Review Sheet #2

Review Sheet #2 - Sample Problems for Midterm #2 BUAD 306,...

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Sample Problems for Midterm #2 BUAD 306, Spring 2011 Introduction This document is intended to be a teaching document as well as a review sheet. I strongly recommend that your review for the second midterm include doing these problems. They resemble midterm questions, and many of them have been taken from my past exams. The questions are not in any particular order. The questions on this review sheet are representative of the questions asked on exams. The question distribution is not representative of the question distribution for an exam. I have not repeated some of the problems I solved in class and some of the homework problems; that does not mean those problems are not useful. There are thirty multiple choice questions on the midterm exam. The first five are direct calculations, the next ten are concept questions, and the final fifteen are quantitative calculations. The average score on the exam will probably be 22-23 out of 30. An average score is roughly a B. The questions are hard and you are not expected to be able to easily answer all of them. Unless otherwise stated, assume that any given interest rates are APRs, compounded as often as you make or receive payments. A Sample Question Many questions on the review sheet can be modified and still make relevant problems. Consider the following question: 1. Which bond would most likely possess the highest degree of re-investment rate risk? a. 4% coupon rate, 5 years to maturity. b. 8% coupon rate, 5 years to maturity. c. 4% coupon rate, 10 years to maturity. d. 8% coupon rate, 10 years to maturity e. The above bonds all have the same re-investment rate risk. The correct answer is B for the question as written. However, I could ask about any bond property. What if I ask for the highest degree of interest rate risk? Default risk? Highest liquidity? Which is the most vulnerable to inflation? Etc. Your study should include ways in which the questions below might be modified to ask about different but related financial topics.
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Additional Questions 2. A bond sold five weeks ago for $1,100. The bond is worth $1,050 in today's market. Assuming no changes in risk, which of the following is false? a. The bond has less maturity today than it did five weeks ago. b. The bond has a smaller premium today than it did five weeks ago. c. Interest rates are higher now than they were five weeks ago. d. The bond's current yield has increased from five weeks ago. e. The coupon payment of the bond has increased. 3. Which of the following indenture clauses will decrease the price of a bond? a. The bond is convertible. b. The bond is protected by collateral. c. The bond is junior rather than senior debt. d. The bond indenture contains protective covenants. e.
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Review Sheet #2 - Sample Problems for Midterm #2 BUAD 306,...

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