BONDS & FINANCIAL ANALYSIS

BONDS & FINANCIAL ANALYSIS - FIN-469 Investments...

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FIN-469 Investments Analysis Professor Michel A. Robe Mid-Term Exam Practice Set and Solutions. What to do with this practice set? To help students prepare for the mid-term exam, two practice sets with solutions have been handed out. In addition, I am handing out this “representative exam” meant to illustrate the length of, and type of questions included in, the midterm. This exam is based on an actual exam that I assigned to Investments Analysis students last year. This set will (naturally) not be graded, but students are strongly encouraged to try hard to solve the questions and to use office hours to discuss any problems they may have doing so. One of the best self-tests for a student of his or her command of the material before a case or the exam is whether he or she can handle the questions of the relevant practice sets. The questions on the exam will cover the reading material, and will be very similar to those here. Conditions under which the MT exam will take place. 90 minutes from start to finish. Financial calculators and one (1) 1-sided cheat sheet allowed. No hand-held computers, data transmitters, etc. Question 1 (10 points): A bill has a bank discount yield of 6.81% based upon the asked price, and 6.90% based upon the bid price. The maturity of the bill (already accounting for skip-day settlement) is 60 days. (a) Find the bid and asked prices of the bill. (b) Calculate the bond equivalent yield of the bill as well as its effective annual yield based upon the asked price. Confirm that these yields exceed the discount yield. Question 2 (10 points): You have borrowed $20,000 on margin to buy shares in Disney, which is now selling at $80 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $75 per share. (a) Will you receive a margin call? (b) How low can the price of Disney shares fall before you receive a margin call?
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Question 3 (5 points): On January 10, you sold short one round lot (i.e., 100 shares) of Netscape stock at $14 per share. On March 10, a quarterly dividend of $2 per share was paid by Netscape. On April 10, you covered the short sale by buying the stock at a price of $9 per share. Assume that you paid 50 cents per share in commissions for each transaction. What is the value of your account on April 10? Explain briefly. Question 4 (5 points): Consider a bond with a 10% coupon rate and with yield to maturity equal to 8%. If the bond’s yield to maturity remains constant, then in one year will the bond price be higher, lower, or unchanged? Why? Question 5 (15 points): We are in 1999. A large forest product manufacturer has outstanding two Baa-rated, $150 million par amount, intermediate-term debt issues: 10.10% Notes Floating-Rate Notes Maturity 2003 2000 Issue date 6-12-93 9-27-92 Callable (beginning on) 6-15-99 10-01-97 Callable at 100 100 Sinking fund None None Current coupon 10.10% 9.9% Coupon changes Fixed Every 6 months Rate adjusts to
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BONDS & FINANCIAL ANALYSIS - FIN-469 Investments...

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