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The document discusses two key points that define the security market line (SML): (1) The risk-free rate is one point because it has a beta of zero. (2) The expected market return is the other point because it has a beta of one. These two points can be used to readily estimate the SML.

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13 views10 pages

TB5

The document discusses two key points that define the security market line (SML): (1) The risk-free rate is one point because it has a beta of zero. (2) The expected market return is the other point because it has a beta of one. These two points can be used to readily estimate the SML.

Uploaded by

afrgod20
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Two points define a straight

line. What two points could


be most readily identified to
estimate the SML?
Ans:
The risk-free rate because the
beta is defined as zero and the
expected market
return because the beta is
defined as 1.00.
Two points define a straight
line. What two points could
be most readily identified to
estimate the SML?
Ans:
The risk-free rate because the
beta is defined as zero and the
expected market
return because the beta is
defined as 1.00.
(1) Duration:

1) rises as the coupon payment rises.

2) is a measure of total return.

3) measures how bond prices change with changes in maturity.

4) is a measure of how price sensitive a bond is to a change in interest rates.

5) is always greater than maturity.


(2) is a measure of how price sensitive a bond is to a change in interest rates
(3) To the nearest dollar, what is the value today of an investment that pays $15,000 in seven
years, assuming an annual opportunity cost of 9%?

1) $15,000

2) $8,206

3) $27,421

4) $7,473

5) $7,130
(4) $8,206

Financial calculator solution


FV = 15,000
I=9
N=7
PV = ? = 8,205.51
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(17) A bank quotes you an effective annual rate of 6% on a monthly investment. What
is the annual percentage rate (APR, or quoted rate)?

1) 6.19%

2) 5.84%

3) 4.83%

4) 6.56%

5) 5.31%
(18) 5.84%

APR = [ ( (1+EAR)^(1/m) ) -1 ] * m =[ (1.06^(1/12)) -1 ]* 12 = 0.0584


(19) A bond with a par value of $1000 and a 8.5% coupon rate has 6 years to maturity.
Coupons are paid semi-annually. If a bond sells for $876, what is the yield to maturity?

1) 7.44%

2) 6.54%

3) 8.34%

4) 11.41%

5) 9.24%
(20) 11.41%

Financial calculator solution


P/Y = 2
FV = 1,000
PMT = 8.5%/2 * 1,000 = 42.5
PV = 876
N = 6* 2 = 12
I = ? = 11.41
(21) You purchase a 8 - year bond at face value for $1,000. It pays a semi-annual
coupon payment of $40. You expect to sell the bond in 2 years. You estimate that similar
bonds will be priced to yield 8% at the time of the sale. If you can reinvest the coupon
payments at 6% annually, what is your expected total return for the 2 - year holding
period?

1) 7.89%

2) 6.86%

3) 4.51%

4) 5.19%

5) 5.96%
(22) 7.89%

Step 1: Sale price in 2 years:


Note: because this bond's expected YTM in 2 years = Coupon rate, calculation is not
necessary: we know that the bond will sell at par = $1,000.
Step 2 - Future Value of reinvested coupons:
P/Y = 2
PMT = 50
N =2 * 2 =4
I=6
FV =? = 167.35
Step 3 - Total Return:
FV = 1,000 + 167.35 =1,167.35
PV = -1,000. Purchase Price
N=4
I = ? = 7.89%
(23) A bond with a 7% coupon rate (paid semi-annually) has two years to maturity. If
the current discount rate is 9%, what is the bond's Macaulay's duration
1) 1.64

2) 1.90

3) 1.81

4) 2.10

5) 1.72
(24) 1.90

Bond Value 6 mths Duration ANNUAL DURATION


Time period 1 2 3 4

Cash Flows 35 35 35 1035

Discounted CFs 33.49 32.06 30.67 867.91 964.1247

Weights 0.0347 0.0332 0.0318 0.9002

wxt 0.0347 0.0665 0.0954 3.6008 3.80 1.90


(25) A bond's Macaulay duration is 11 years. If the current annual interest rate is 5%,
what is the modified duration of this bond?

1) 11.50 years

2) 1.01 years

3) 10.48 years

4) 11.00 years

5) 12.48 years
(26) 10.48

11 / 1.05 = 10.48
(27) What is the discount yield on a $1,000 par value Treasury bill with exactly 182
days to maturity, priced at $964.5?
1) 10.20%

2) 7.02%

3) 8.43%

4) 6.38%

5) 9.27%
(28) 7.02%

Discount Yield = (Pf[ - P0)/Pf ]* (360/h) =[(1000 - 964.5)/1000]*(360/182) = 0.0702


(29) A bank buys a $10,000 Treasury bill (zero-coupon) with a maturity of 1 year.
Current market rates are 11.5%. If interest rates fall to 11.05%, what is the approximate
change in the price of the T-bill?

1) 403.59%

2) 40.36%

3) 4.04%

4) -0.02%

5) 0.40%
(30) .40%

ΔP/P = -[Duration/(1+i)]*Δi =- [1/(1+0.115)]*(0.1105 - 0.115) = 0.40%


(31) There is an inverse relationship between a bond's duration and its price volatility.
1) True

2) False
(32) false
(33) What is the Macaulay's duration of a 10 year zero-coupon bond with a face value
of $1,000 and a market rate of 8%, compounded annually?

1) 12 years

2) 10 years

3) 13 years
4) 11 years

5) 10.32 years
(34) 10 years
(35) To the nearest dollar, what is the value today of an investment that pays $10,000
in five years, assuming an annual opportunity cost of 6%?

1) $8,626

2) $11,592

3) $10,000

4) $7,130

5) $7,473
(36) $7,473

Financial calculator solution


FV = 10,000
I=6
N=5
PV = ? = 7,472.58
(37) What is the effective annual rate of an investment that offers 8%, compounded
quarterly?

1) 8.16%

2) 8.64%

3) 8.24%

4) 8.32%

5) 8.00%
(38) 8.24%

Effective Rate = (1 + .08/4)4 - 1 = .0824


(39) A bond with a par value of $1000 and a 13% coupon rate has 20 years to maturity.
Coupons are paid semi-annually. If a bond sells for $1257, what is the yield to maturity?

1) 10.78%
2) 10.00%

3) 12.49%

4) 11.56%

5) 11.00%
(40) 10.00%

Financial calculator solution


P/Y = 2
FV = 1,000
PMT = 13%/2 * 1,000 = 65
PV = 1,257
N = 20 * 2 = 40
I = ? = 10
(41) You purchase a 10 - year bond for $968. It pays a semi-annual coupon payment of
$40. You expect to sell the bond in 4 years. You estimate that similar bonds will be
priced to yield 10% at the time of the sale. If you can reinvest the coupon payments at 6%
annually, what is your expected total return for the 4 - year holding period?

1) 5.80%

2) 3.81%

3) 5.04%

4) 6.38%

5) 4.38%
(42) 6.38

Step 1: Sale price in 4 years:


P/Y = 2
PMT =40
N =6 * 2 =12
I =10
FV = 1000
PV = ? =900.02
Step 2 - Future Value of reinvested coupons:
P/Y = 2
PMT = 50
N =4 * 2 =8
I=6
FV =? = 344.31
Step 3 - Total Return:
FV = 900.02 + 344.31 =1,244.33
PV = -968.00 Purchase Price
N=8
I = ? = 6.38%
(43) A bond that has an annual coupon rate of 11% has three years to maturity. If the
current discount rate is 16%, what is the bond's Macaulay's duration?

1) 2.89 years

2) 3.00 years

3) 2.69 years

4) 2.79 years

5) 2.99 years
(44) 2.69
(45) A bond's Macaulay duration is 3.4 years. If the current annual interest rate is 11%,
what is the modified duration of this bond?

1) 3.06 years

2) 3.40 years

3) 2.96 years

4) 4.13 years

5) 4.00 years
(46) 3.06

3.4 / 1.11 = 3.06


(47) A 60 -day Treasury bill is quoted as having a 7% bond equivalent yield. What is
the effective annual yield?

1) 7.93%

2) 7.21%
3) 8.72%

4) 7.00%

5) 9.59%
(48) 7.21%

i* = [1 + i/(365/h)]365/h - 1 = [1 +0.07/(365/60)]365/60 - 1 = 0.0721


(49)

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