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TOWSON FIN 331 - Questions for Extra Credit Points.

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40 Questions for Extra Credit Points. 60 more will come shortly. Due 12/7 (Monday)(Please show your work and provide your explanation)You need to show your work and explanations. Jotting down only the answers is not acceptable. If you do all 100 questions, you will get up to 3 extra points added to your final total score (after I determine your total score based on mid-terms, HWs, and the final). Chap 51. How long will it take for you to pay off $1,200 charged on your credit card, if you plan to make the minimum payment of $10 per month and the credit card charges 24% per annum? A) 10 years B) 35 years C) 100 years D) 174 years E) You may not be able to pay off the debtE) PV=1200, PMT=10, i/Y=2%, n=infinite, there is no way you can pay of the debt in this case. $10 is not enough to catch up the increase in the interest2. If APR=10%, what is the EAR (effective annual rate) for semi-annual compounding?A) 10% B) 10.25% C) 12.36% D) 13.56%E) 15.52%B) iear = [1+(i/n)]n-1, where n is the number of compounding per year. [1+(0.1/2)]2-1=0.1025 => 10.25%Chap 6.1. If US T Bill has 4% return, what is the risk premium of an investment which has 7% required rate of return?A) 3% B) 4% C) 5% D) 5.5% E) 7%A) Interest rates (Rk) = Real risk free rate (RRF) + Expected inflation rate (IP) + Risk premium (RP), considering impact of inflation is same on both T Bill and the investment, risk premium is 3% for the investment with a same maturity2. Which one is not the determinant of market interest rate of a security? A) Risk free rateB) Expected inflation rateC) Risk premiumD) Realized inflation rateE) A and BD) Interest rates (Rk) = Real risk free rate (RRF) + Expected inflation rate (IP) + Risk premium (RP) 3. Which one is not the source of the premium? A) Default riskB) Liquidity C) Maturity risk premiumD) InflationE) Nominal interest rateE) Interest rates (Rk) = Real risk free rate (RRF) + Expected inflation rate (IP) + Default risk premium (DRP) + Liquidity premium(LP) + Maturity risk premium (MRP). Nominal interest rate is the outcome of the risk premium sourcesChap 7.1. York, Inc. issued 6%, semi-annual coupon bonds outstanding with 10 years to maturity. The bond’s par value is $1,000 and expected to earn 8.42%. What is the current yield for York, Inc?A) 3.49%B) 3.58%C) 7.16%D) 8.29%E) 6.00%c) N=10*2=20, I=8.42/2=4.21%, PMT=(0.06*1000)/2, FV=1000 => PV=838.57, Current yield = Annual coupon payment/current price = 60/838.57 = 7.16%2. Birdland, Inc. has 8.8% semi-annual coupon bonds with 15 years to maturity. The bonds are selling at $965.75 with a face value of $1,000 and a call price of $1,020. The call provision specifies the bonds may be called in 5 years. What is the rate of return investors expected to earn if the Federal Reserve is expected to lower the benchmark rate?A) 11.35%B) 7.90%C) 4.65%D) 10.01%E) 9.30%D) YTC calculation. N=5*2, PV= -965.75, PMT=(0.088*1000)/2, FV=1,020=> I=5.00, 5.00*2=10.01%3. Which indenture provision may affect the price of the bond differently? A) convertibility B) sinking fund C) call D) restrictions on dividends E) collateralC) Call provision benefits the issuer. All the other provisions benefit the investor4. White & Decker Co. has 7% semi-annual coupon paying bonds outstanding maturing in 20 years. The bond’s par value is $1,000 and expected to earn 5.89%. What is the expected capital gains yield for White & Decker Co.’s bonds?A) Between 6% and 7%B) Greater than 7%C) Between 0% and 5%D) Between 5% and 6%E) Less than 0%E) Since the coupon rate is greater than YTM, White & Decker, Co.’s bonds sell at a premium (the current price is greater than the face value). So, expected capital gains yield will be negative (capital gains between your current price and the price you are selling it for (this time, it is the Face Value)).5. Queens of Leon Corp. has 9.8% semi-annual coupon bonds outstanding with a face value of $1,000. It will mature in 20 years and current YTM is 10.24%. However, Queens of Leon Corp.’s bonds have a call provision in 5 years at a call price of $1,020. The Federal Reserve is likely to lower the benchmark rate. What is the rate of return investors are likely to earn on Queens of Leon Corp.’s bond?A) 5.55%B) 10.95%C) 11.10%D) 10.78%E) 9.11%C) N=20*2=40, I=10.24/2=5.12%, PMT=(0.098*1000)/2, FV=1,000=> PV= 962.86N=5*2, PV= -962.86, PMT=(0.098*1000)/2, FV=1,020=> I=5.55%, 5.55*2=11.10%6. Consider a 10 year semi-annual coupon paying bond with a face value=$1,000 and a coupon rate=8%. What is the PV of the bond at 8% discount rate? If the market price of the bond is $1,050, would you buy the bond?A) $909.09, Buy B) $1010.10, Buy C) $909.09, Don’t D) $1000, Don’t E) $1000.00, BuyD) Because coupon rate = YTM, the PV or the current price is $1,000. Comparing to the market price of $1,050, the market price is overvalued. Therefore, don’t buy.7. If an issuer can retire the bond prior to its maturity, what kind of indenture provision does the bond have? Does the return on this bond tend to be higher or lower than a bond without such a provision?A) convertibility higher B) convertibility lower C) call higherD) sinking fund lower E) sinking fund higher C) It is a call provision. Because a call provision is used to enjoy the lower market interest rates, the issuer should provide a compensation for the investor as a form of higher call price than the par value. This will make the return higher of the bonds with a call provision than the bonds without such a provision.8. WSJ quotation of a Treasury security (semi-annual coupon paying) is as follows:Rate 8 7/8 Maturity Nov 18 Bid 124:04 Asked 124:10 Chg 14. .(Explanations: coupon rate, maturity date Nov 2019 (10 years from today), you get paid if you sell at 124+4/32% or 124.125% ofthe FV, you need to pay if you buy at 124+10/32%. Ignore the rest). What is the PV of the bond at 10% discount rate? What is the YTM of the bond evaluated at the asked price? A) $929.90, 5.66%B) $935.90, 5.66%C) $929.90. 5.78%D) $935.90, 5.78%E) $1,000, $5%B) PV: N=10*2, I=10/2, PMT=(0.08875*1000)/2, FV=1000 => PV=929.90YTM: N=10*2, PV=1000*[{124+(10/32)}/100], PMT=(0.08875*1000)/2, FV=1000 => I=2.83*2=5.66%9. A muni is offering 8% interest. What should the return on a corporate bond be so that both the muni and the corporate bond are equally competitive when you are in a 30% tax bracket?A) 11.43% B) 12.34% C) 13.56% D) 14.12% E) 13.8%A) Tax equivalent yield = tax-free yield /


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