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# ADMS3530-Final-F06-Sol - Name Section ID(Prof Kings section...

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Page 2 Numerical Questions 1. (Q. 4 in B) What is the annual rate compounded monthly that is equivalent to 8% compounded quarterly? A) 0.66% B) 7.72% C) 7.95% D) 8.00% Solution (1 + 2%) 1/3 – 1 = 0.66% monthly rate, APR = 7.95% 2. (Q. 6 in B) How long (approximately) would take to pay back a \$200,000 loan with a monthly payment equal to \$1,510 if the quoted interest rate is 6% compounded monthly? A) 3 years B) 8 years C) 11 years D) 18 years Solution PMT = 1510, PV = -200,000, I = 0.5%, so n = 218 months 18 years 3. (Q. 5 in B) What is the price of a 20-year bond with a 5% coupon rate, a face value of \$1,000 and pays semi-annual coupons, if the effective annual YTM is 5%. A) \$1,000 B) \$1,008 C) \$1,050 D) \$2,000 Solution i = (1+5%) 1/2 – 1 = 2.4695% PV = \$25 x PVIFA(2.4695%,40) + \$1,000 x (1+2.4695%) -40 = \$1,008 4. (Q. 3 in B) A perpetual bond with a 6% coupon rate and a \$1,000 face value sells for \$1,200. What is the YTM? A) 5% B) 6% C) 8% D) 10% Solution YTM = \$60/\$1,200 = 5%
Page 3 5. (Q. 1 in B) A stock is expected to pay a \$2 dividend next year and a \$5 dividend in year 3. You buy the stock today at \$75 and expect to sell it at the end of year 3 realizing an expected annual return of 0%. What is the expected stock price at the end of year 3? A) \$68 B) \$75 C) \$82 D) \$100 Solution P 0 = \$75 = \$2 x (1+0%) -1 + \$5 x (1+0%) -3 + P 3 x (1+0%) -3 gives P 3 = \$68 6. (Q. 2 in B) What is your expected rate of return on a stock that you buy at \$113 today, if you receive the following dividends: Div 1 = \$3, Div 2 = \$4, Div 3 = \$5; and you sell it at the end of year 3 at P 3 = \$120? A) 1.41%

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ADMS3530-Final-F06-Sol - Name Section ID(Prof Kings section...

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