COMM 298 MT 2 - Commerce 298 Midterm Examination Sections...

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Unformatted text preview: Commerce 298 Midterm Examination Sections 201, 202, 203, 204, 205,206 FEBRUARY 28, 2006 PLEASE READ THE FOLLOWING: 1 . This examination consists of 10 pages of questions plus this cover page. Please check to ensure this paper is complete. 2. No candidate shall be permitted to enter the examination room after the expiration of 1/2 hour, or to leave during the first 1/2 hour of the examination. Candidates are not permitted to ask questions of interpretation. is: “What does this mean?” 3. Individual calculators permitted (graphing calculators, TI 83 etc - are NOT permitted). No other materials are allowed. Please show ALL work on this exam paper in the space provided. 4. Cell phones must be turned off and are not permitted to be in view or be used as a watch during this exam. 5. Detailed work must be shown to receive credit. You must clearly show all formulas complete with appropriate values for the variables and calculations to support your answers. No credit for answers only! Routine arithmetic calculations should NOT be shown. 6. Time: 90 minutes Last name If s ‘ ~ ' First name '35 1—1 {ff-Ci Student Number 2: Signature: Section 2, (I Maximum Possible Maximum Suggested Time minutes Question 1 ( 26 marks) (a) (3 marks) A company is considering an investment project that will pay $1,300 one year from now and $500 two years from now. The present value of these cashflows at a discount rate of 7% per year is $1651.67. If the discount rate was 10%, would the present value of these cash flows be higher or lower? Explain. Do not calculate. 4“: PM‘Tch-t IT”: fhéfit (fly—1r; {OH}? (lv'lbLl/‘rv{ be Nklglcn‘s'lnf I f ‘(n' (b) (4 marks) You buy a new $25,000 car and will make monthly payments at the end of each month for 6 years. If the APR is 8% per year, compounded semi-annually, determine the value of the monthly payment. I ‘ 3‘2 l \ l It‘ll]; h36X[zLC?—72_ *l .0214 ' l/V: A[l‘(w' i= "ilf‘tOk'W : ' 4L}.LJ(‘,‘L\( \‘ 67i—iii‘é'5" $3“11’33cu. 6.4. < Pars/(“"0 (c) (2 marks) What are agency problems in a firm? ‘ . x: \ ("BC i gt 5“ (\i‘.’ l (54. -’ :2 (MAC W" :‘NU I Page 1 of 10 (2 marks) Explain what is meant by interest rate risk. ( "J 4 Q (11 l\ \L“”;‘~{' t0 CL” U) “1 l/\ I“ V13 ' , , , . . d (/7 g \. \: (j i, l! '-C g (L l l; ’i 5} ‘ i301” ‘ ‘4‘: ‘v: ( ° ’ (2 marks) An investor buys a stock for $12.00 and 4 years later sells it for $19.00. If no dividends were received over the first 3 years but the investor received a dividend of $2.00 at the end of the fourth year, calculate the annualized realized rate of return. 0 ll :2 .112, 2' 'al’ZOt‘r‘wL’ r ’/ R +2 ’33; (z, J‘SQIC '2 r ” fl ‘1' , O-‘S l, “f / . i (3 marks) What makes stocks more difficult to price than bonds? Please use point form when answering this question. k ‘ 5* I, i a ‘2 ‘1 “g V / ‘ Stcfik‘": iii" ‘ ‘1 it I 1 Iain 001.2. lit/10ft 1174!”. / ° 3+0 (“le C(A‘v‘ hmmk” .1 , {. 4;. ' {kl/x / I; l 1 i ‘ 4'- 1. ,. l i /’ \ l > I L4“ u l x l 0 i "r (fright) ‘ f." A“ U“ tfi Ol . . k \\‘_/ lo Wva (2 marks) An annual coupon bond with a coupon rate of 10% is currently selling for $ 1,077.88. If the face value of this bond is $1,000 and there are 6 years remaining to maturity, which one of the following yields to maturity is correct. A) 0.145 10775237 : tool) l“ ( l * Tia-1f lm:~( ltd—C B) 0.123 L ,J (3)0100 «~.py0.083 lC‘O 6000‘ (077331“) f, E) 0.072 77:... t ._ ’ . O /’ H: _ , Q l’ZOil Your answer:___.12________ N" ,("T ‘ Page 2 of 10 (h) (3 marks) Suppose you invested money at 6% per year in year 1 and 8.5% in year 2. In addition, suppose that inflation was 2% in year 1 and 3.2% in year 2. At the end of the 2 year period, how much has your purchasing power increased/decreased? Q I mex‘wkwNWHil 3min sbfb ; paid -/ he» ; c in; ‘ , / q /2 {K‘E‘ ‘ DO?) 3 1 l:(§?¢ immeofie by Vi, ~22 \e/ (i) (5 marks) You make monthly payments of $95 at the end of each month into an account which pays 9% per year, compounded monthly. How many monthly payments would you need to make until you had at least $18,000 in this account? 0 at r, M” 0C {J / ,/"' “ EV: ("r W: n (in. .\ ’ "' r - I i « \ if I : InOCT l: l gull: «truth , Qty; \w/cwf 5 I 'N 75w?» XH'JV‘ (Qw/(W’N/ infill VOL” Page 3 of 10 Question 2 (12 marks) The Roberts family has twins, Amos and Becca. Every month, since the day they were born, the Roberts family has received§200jrom a relative. This money is to be put in the bank and be given to the children on their 18‘“V,birthday. The laggayment will arrive on the twins 18‘“ birthday. The Roberts family has decided that to simply the monthly banking activities, they will put the first $200 amount in Amos’ account, the next $200 amount into Becca’s account and alternate like this until the twins 18‘“ birthday. (a) (b) (7 marks) If the money can be invested at 0.5% per month, how much will be in Amos’ account on his 18‘“ birthday? (Tar 7' n (Slots; “3 (5 marks) Without using any calculations, would Becca’s account balance on her 18‘“ birthday be the same, lower or higher than her twin brother’s? Circle the correct response and explain. Same Low?) Higher \.‘_K,,..V - Explain: Stiff”; AMNOE F€CC[V¢(§ Pay/vaw‘ Mal], ){r x I k 5.1 .N V ' 1“ ""‘«"» f“ " 4C {\l" Vtviw (z ‘ :i ftfrf [C Euflfialt 1’” or’t‘tn U (H A f Y“ 5“ €0\/"’M‘\‘/+~ 1/fo P610 rt. barn (mix {A J C. ', N a l \ ’ ‘ rm“ v 17“ . t. UL’L ‘ l6 «d {mt/MN v A; I (/(2\ gm V Page 4 of 10 K, g fl : ¥ 7:) .1, ll (H "v :1 mo Z90 » “0.) 01“ I I l ’ ‘5 _m .>< p / ”" M "‘ W «i I FV Helng ""l.’ r/ ’ d new” i »l r \«l w ‘ ‘ 1, ‘ l I“EN z 20:" 7» 6 Il' I \/ /‘/ / I cfi I ' “ PM 7\,:’ d“ Ar“ l g ‘ ' R W“ ‘/ // LlLU b M3166 / I / l 4" i \' ’4 ’ \ “- K» t), kwnkjc}, - (yie’M):{\l'tf‘ ;(C€[€// ) Question 3 (15 marks) Marvin paid $1.72§§;0_Q_,e_ight years‘ago to purchase a Government of Canada bond with a face value of $3] The bond had eighteen years to maturity at the time Marvin bought it, a couponiateji 91/9, with coupons p_a_i_d semi-annually, and a yield to maturity (YTM) of 6.5%. When Marvin bought this bond, he intended to hold it to maturity. Now, eight years later, Marvin needs cash and has to sell the bond. The bond market now requires a YTM on the bond/of/ALQ‘ZQ: Assume that Marvin sells the bond today, just after the bond has paid its most recent coupon. Over the eight year holding period, Martin deposited the bonds coupon payments in a Super-Saver bank account earning 3% APR, compounded monthly. (a) (5 marks) Calculate the price at which Marvin sells the bond today. 0 it: p, | b IOXZ l l 20 “'j/TM 2' m K l, r “-13 0‘ CR: \LO S El“ (1074‘) 4 l~ (l “h “k C w 145 (b) (g/marks) Marvin’s cash needs forced him to sell the bond today. Did this hurt Marvin financially? Please provide a brief explanation. )‘QO TQMJ 6‘0 V‘fi' £71 ‘ F(0? th‘i HWQHF/‘Jlry (.:[I";CC. Kyla l E2131 'T ‘“= H [Lu {rt lugit/ [41: l mu, .- . purcl l 7 Page 5 of 10 © (8 marks) Calculate Marvin’s realized holding period rate of return on this bond investment. How does it compare to the bond’s purchase date YTM of 6.5%? Please give a brief economic explanation for your result. fl. _ .07) \R I: )4 7‘9“ (1.;‘3fivf’ '1" 3+5 i [‘f :\/ "f " < l + /) ‘”“ l l” Y L a C3330“ - \‘T. \ (Hm 1 ~ _l i I N E,” lea ‘ [.0731 fil‘ifi: ( hi, (6 (‘qu ‘ t; q E Q 1 b V lei. wig: L15- (lx‘izwii, l , Citing" : ¥ \k; (if C501 :11,” l//' l: \/ :1 PVC l +ar“ p. A c , I we» \ /21g(.'/Z. fig, l~“ 4/2”“ \ l2} 1 /// ( x / r" 1/ r“: . O F\ )k, / L//;:/fi’””—~‘\\ [ A x >\ / l «it, WW 1 Q m _. C ( Ct (/{I( lp0§01i ‘/ \1 “ ‘{‘\-»/-_ «if l M JV ‘ M LA 01C Wt \Jorcé ita+€ WM W 6 "(V Page 6 of 10 Question 4 (16 marks) While vacationing in Mexico, Carl has an opportunity to purchase a real estate investment, called a 10~year Time-Share. Two different Time—Share deals are available: Deal A requires only [payment of $26,000 to be paid at the beginning of the lgyea‘rj'ime—Share; Deal B requir§aWWfi3aTrWefit to be paid at the beginning cf the 10 year Time—Share AND a $800 per year “fee”, payable at the beginning of each year for which he has use of the Time— share. Except for the financial requirements set out above, both Time-Share deals offer the same benefits. You may assume that both Carl and the Time—Share company use a rate of 9 °/o per year, compounded annually to discount their cash flows. You may also assume that this rate is in effect for all parts of this problem . (a) (7 marks) Which is the better economic deal for Carl to take? Explain and provide convincing numerical evidence, ‘\ f i. Ljqu A f) jzéx’“ \& Page 7 of 10 Carl is not yet sure that he wants to buy a Time-Share, but assume that if he does, he will purchase Deal B. To encourage him to purchase Deal B, the salesman offers the following incentive: “Our Time—Share company will promise to re-purchase your Time-Share from you at the end of year 10. Our re-purchase price will be your original down payment of $20,000 increased at the rate of 4% per year. You would be making money on this deal because the re-purchase price will easily exceed the $28,000 in total costs that you paid.” (i) (1 mark) Calculate the exact dollar re—purchase price that the salesman is offering. ":1. g 3 .2C) , ‘ __ fl, “.0, .._w....,_,._..~‘ \ if}. ('QQK‘K ‘ i (ii) (1 mark) Show the calculation the salesman used to arrive at $28,000. \ r i 800 X [0 Pat/punts; :Jchcwfi.‘ :; '\ V (iii) (3 marks) Comment on the salesman’s claim that the re-purchase price will exceed Carl’s costs. No calculations are required. /’ "x . v l , KW idolxi’wi‘d" a luau ‘ ‘ r “‘4 ‘[ lvww W9: HO) +CADxr I’V/C‘ WW ‘ 2+ vw. Di (7/ (iv) (4 marks) If Carl is only concerned with the economic aspect of this Time-Share investment, should Carl invest in the Time-Share? By how much will he be better off or worse off? Explain and include appropriate calculations as needed. Page 8 of 10 ...
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This note was uploaded on 01/07/2011 for the course COMM 298 taught by Professor Freedman during the Spring '09 term at The University of British Columbia.

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COMM 298 MT 2 - Commerce 298 Midterm Examination Sections...

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