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Unformatted text preview: 1 Name: Student ID: Section: AP/ADMS 4540 Financial Management Fall 2010 Exam 1 Instructor: Dr. William Lim Time Limit: 1 ½ hours Instructions: Answer all 5 questions of this exam in the spaces provided on the question sheets. (If necessary, you may write on the back of the sheet). Any resemblance to actual or TV characters is purely coincidental and although the stories may appear "plausibly real", they are fictitious. You have 1 ½ hours to work. The marks for each question are given. Please provide the marker with the greatest opportunity to give you credit by showing all calculations clearly. Answers without clear calculations will be penalized . Only normal writing instruments, a calculator and one 8.5"x11" or letter-size page list of hand-written formulas may be used to write this test. This formula sheet must be submitted with the test ; otherwise you will automatically receive a mark of zero (0). Question 1 (10 marks) Calculate the RVs, WVs, price, duration and volatility of a 5-year, $1,000 face value, 14 percent coupon bond yielding 13 percent with coupons paid annually. Why are duration and volatility important? Using its duration and volatility, calculate what happens to the price of the bond when the yield to maturity rises to 14 percent. 2 Question 2 (20 marks) With Canadian interest rates still at historical lows, McGraw-Hill-Ryerson (MHR) is considering whether to take advantage of its lower cost of debt and refund its old bonds. Suppose the old issue comprises $25 million, 12 percent coupon rate (paid yearly) 20-year bonds that were sold 5 years ago. A new issue of $25 million, 15-12 percent coupon rate (paid yearly) 20-year bonds that were sold 5 years ago....
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- Spring '11