# 1. classify the following financial instruments as money market

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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?