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Unformatted text preview: Business 3059 Investment Management Lakehead University Midterm Exam Philippe Gr egoire Fall 2002 Time allowed: 1 hour 15 minutes. Instructions: Calculators are permitted. One 8 . 5 11 inches crib sheet is allowed. The marks awarded for each question are in brackets. Good luck! Part I: True or False . For FOUR of the following statements, say if the statement is true or false (2 points), and explain why (3 points). 1. Calculating a TBill yield using the bank discount yield method necessarily gives a lower value than if it is calculated with the bond equivalent yield method. True: Consider a Tbill that matures in n days and let P denote the current price of of the TBill, with a face value of $1,000. For the return on this TBill to be positive, we need P < 1 , 000. The bond equivalent yield is then given by r bey = 1 , 000 P P 365 n . On the other hand, the bank discount yield for this TBill is given by d = 1 , 000 P 1 , 000 360 n . 1 The bank discount yield can only be lower than the bond equivalent yield since d = 1 , 000 P 1 , 000 360 n = 1 , 000 P P P 1 , 000 365 n 360 365 = 1 , 000 P P 365 n 360 365 P 1 , 000 = r bey 360 365 P 1 , 000 = r bey P 1 , 013 . 89  {z } < 1 < r bey . 2. A mutual fund never sells above its net asset value. False: A closedend fund may either sell above or below net asset value. 3. Let R denote the nominal interest rate and let i denote the inflation rate. Then r = R i is always a good approximation of the real rate of interest. False: This approximation is good only for small values of of R and i . For example, if R = 80% and i = 70%, then R i = 10% whereas the exact real interest rate is 1+ R 1+ i 1 = 1 . 8 1 . 7 1 = 5 . 88%. 4. The profit made on a short sale is the mirror image of the profit that would have been made had the stock been bought and then sold. True: Let p denote the stock price at the time of the short sale and let p 1 denote the stock price when the osition is covered. Let d denotes the dividends that have been distributed to shareholders meanwhile. Since the short seller has to pay dividends to the stock lender, the profit from the short sale is p ( p 1 + d ). If, instead, the stock had been bought and sold, the traders profits would have been p 1 + d p , which is indeed the mirror image of the profit from the short sale....
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This note was uploaded on 03/01/2012 for the course FINANCE 780 taught by Professor Scott during the Spring '12 term at Missouri State UniversitySpringfield.
 Spring '12
 Scott

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