finance QUESTIONS with solution – MIDTERM

Midterm
Due: August
4, 2013

Rules: The
Excel questions need to be done in the accompanying Excel file. You will email
this exam copy and the Excel file by due date. If you are unable to write the
formulas in MS Word then you will write them by hand and scan the exam and
email the exam and excel file by due date.

1. Classify the following financial instruments as money market
securities or capital market securities in a table:
a. Bankers Acceptance b. Commercial papers c. Common Stock d. Corporate Bonds
e. Mortgages f. Negotiable Certificate of Deposits g.
Repurchase Agreements
h. U.S. Treasury Bills i. U.S. Treasury Notes j. Federal Funds

2. Calculate the present value for the following: (Excel)
a. $5,000 received at the end of 5 years if your investments pay 6%
compounded annually.
b. $5,000 received each year for 5 years on the last day of each year
if your investments pay 6% compounded annually.
c. $5,000 received each quarter for 5 years on the last day of each
quarter if your investments pay 6% compounded annually.
d. $5,000 received each year for 5 years on the first day of each year
if your investments pay 6% compounded annually.

3. Go to Wall Street Journal Market Data Center and find the most
active investment grade bonds. Choose one bond from the list. Also, find the
treasury yield of the 30 year bond on August 01, 2013 from U.S. Treasury. Then,
calculate the Default Risk Premium for your bond. (Be clear in the name of the
company you have chosen.)

4. If we observe a one-year Treasury security rate higher than the
two-year Treasury security rate, what can we infer about the one-year rate
expected one year from now?

5. Calculate the following values in Excel.
a. A 10-year, 12 percent semiannual coupon bond, with a par value of
$1,000 sells for $1,100. What is the bond’s yield to maturity?
b.A 8 percent semiannual coupon bond, with a par value of $1,000 sells
for $895. If the bond’s yield to maturity is 5% then what is maturity of the
bond in years?
c. A 10 year, 8 percent semiannual coupon bond, with a par value of
$1,000 and yield to maturity is 5%. What is price of the bond?

6. Calculate the fair present value of a bond that pay interest
semiannually, has a face value of $1,000, has 14 years remaining to maturity,
has a required rate of return of 10 percent and 8 coupon rate. (Write
down the formula and solve it either by calculator or excel)

7. A stock just paid an annual dividend of $2.50. Dividends are
expected to grow at 1.5 percent. If the required rate of return on the stock is
12 percent, what is the fair present value? How is your answer change if the
required rate of return is 15 percent?
(Write down the formula and solve it either by calculator or excel)

8. Why Fed cannot choose both interest rate targeting and money supply
targeting? Explain using graphs.
9. What is the difference between a discount yield and bond equivalent
yield? Which yield is used for Treasury bill quotes?

10. Write the differences between the following in a tabular
form:
a. T-Bills, T-Notes
and T-Bonds
b. General
Obligation Bonds and Revenue Bonds
c. Bearer bonds and
Registered bonds
d. Term bonds and
Serial bonds

11. What is the bid price of a $10,000 face value T-bill with a bid
rate of 2.35 percent if there are 50,
100, and 250 days to maturity? (Write down the formula and solve it either
by calculator or excel)

12. You plan to purchase a $ 100,000 house using a 30- year mortgage
obtained from your local credit union. The mortgage rate offered to you is 8.25
percent. You will make a down payment of 20 percent of the purchase price. (Excel)
a. Calculate your monthly payments on this mortgage.
b. Calculate the amount of interest and principal paid
for all payments.
c. Calculate the
amount of share of interest and share of principal of the monthly payments for
all payments.
d. Calculate the amount of interest paid over the life
of this mortgage.

13. At the beginning of the year, you purchased a share of stock for
$40. Over the year the dividends paid on
the stock were $5.00 per share.
Calculate the return on a stock if the price of the stock at the end of
the year is $30 and $50. (Write down the formula and solve it either
by calculator or excel)

14. Assume there are 5 stocks: A, B, C, D, E of 5 different firms. You
are to calculate an index using their prices and values. Say the prices of
these stocks today are 25, 30, 50, 20, and 60 respectively. The firms have
100m, 80m, 120m, 200m and 250m shares outstanding, respectively.
a. what is the price-weighted index for today?
b. what is value-weighted index for today?

Assume that the price changes to 20, 25, 55, 18, and 50 respectively
next day.
c. What is the new price-weighted index for next day?
Calculate the percentage change in the price-weighted index?
d. What is the new value-weighted index for next day?
Calculate the percentage change in the value-weighted index?

Assume that firm E divides the stock using a two-for-one split
formula. What will be the new divisor for the price-weighted index?
(Write down the formula and solve it either by calculator or excel)

15. You have taken a long position in a call option on IBM common
stock. The option has an exercise price of $136 and IBM’s stock is currently
trading at $140. The option premium is $5 per contract.
a. What is your net profit on the option if IBM’s stock price
increases to $150 at expiration of the option and you exercise the option?
b. What is your net profit on the option if IBM’s stock price
decreases to $130 at expiration of the option?