Quiz #2 - Finance 355: Investments Fall 2011 Instructor:...

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1 Finance 355: Investments Fall 2011 Instructor: Shuming Liu QUIZ 2 QUIZ PAPER A 1 c 6 c 11 a 16 b 2 d 7 e 12 b 17 b 3 d 8 e 13 c 18 b 4 d 9 e 14 b 19 b 5 d 10 b 15 c 20 d QUIZ PAPER B 1 a 6 c 11 b 16 c 2 b 7 d 12 b 17 e 3 c 8 d 13 b 18 e 4 b 9 d 14 b 19 e 5 c 10 d 15 d 20 b See the next few pages for detailed answers.
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2 QUIZ 2 Quiz Paper A 1, Quiz Paper B 6 Which one of the following measures a bond's sensitivity to changes in market interest rates? a. yield to call b. yield to market c. duration d. immunization e. target date valuation Answer: c Quiz Paper A 2, Quiz Paper B 7 JJ Industries will pay a regular dividend of $2.40 per share for each of the next four years. At the end of the four years, the company will also pay out a liquidating dividend, and the company will cease operations. If the current share price is $50 and the discount rate is 10%, what must the liquidating dividend be? a. $40 b. $50 c. $58.60 d. $62.07 e. $65.87 Answer: d P0 = $2.40/(1.10) 1 + $2.40/(1.10) 2 + $2.40/(1.10) 3 + $2.40/(1.10) 4 + $LD/(1.10) 4 = $50.00 $42.39 = LD/(1 + .10) 4 , So LD = $62.07. Financial calculator: PV = (-)50, PMT = 2.40, N = 4, I = 10 Î FV = 62.07 Quiz Paper A 3, Quiz Paper B 8 An 8.5 percent coupon bond pays interest semiannually and has 10.5 years to maturity. The bond has a face value of $1,000 and a market value of $878.50. What is the yield to maturity? a. 5.16 percent b. 8.37 percent c. 8.78 percent d. 10.43 percent e. 11.21 percent Answer: d. Financial calculator: N = 10.5 × 2 = 21, PMT = 1000 × 8.5% / 2 = 42.5, FV = 1,000, PV = (-)878.50 Î i = 5.216. So YTM = 5.216% × 2 = 10.43%
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3 Quiz Paper A 4, Quiz Paper B 9 LKD Co. has 10 percent coupon bonds with a YTM of 8.6 percent. The current yield on these bonds is 9.2 percent. How many years do these bonds have left until they mature? (Face value is $1,000 and coupons are paid semiannually.) a. 18.52 years b. 18.14 years c. 9.26 years d. 9.07 years Answer: d Current yield = 0.092 = $100/P0; So P0 = $100/0.092 = $1,086.9565
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This note was uploaded on 11/18/2011 for the course FIN 355 taught by Professor Phsiao during the Fall '08 term at S.F. State.

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Quiz #2 - Finance 355: Investments Fall 2011 Instructor:...

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