Note: In responding to "WHY/Explain" you should
N
AME
________________________________
give a meaningful explanation that would convince a skeptic.
S
CHOOL
OF
B
USINESS
A
DMINISTRATION
F
INANCE
350
Q
UIZ
#2
P
ROF
. J
ARRAD
H
ARFORD
1.
The price of a oneyear strip is 95:08.
The yield curve tells you that the spot rate for a
term of 6 months is 5% APR, compounded semiannually. What is the price of a oneyear 4%
coupon bond with its next coupon due in 6 months? (2pts)
4% coupon means 4% of $1000 paid in semiannual installments: $20 every 6 months.
So the CF from the bond are:
6
MONTHS
1
YEAR
20
1020
95:08 means that 95 8/32 today gets you 100 in one year, or $95.25 is the PV of $100.
Thus, $0.9525 is the PV of $1.
Then the PV of $1020 in one year is 0.9525(1020)=971.55
The only thing left is the PV of the CF in 6 months. We are given the 6 month rate as
5% APR, compounded semiannually.
So, the price of the bond is $19.51 + $971.55 =
991.06
2.
What is the connection between NPV and shareholder wealth? (2pts)
Net Present Value is equal to the total effect on the value of the firm (in present value) of the
project. Since total shareholder wealth is simply the value of the equity in the firm, the NPV
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 Winter '08
 SCHONLAU
 Finance, Net Present Value

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