Question

QUESTION 3 Sarah owns investment A and 1 bond B. The total value of his holdings is $2,200. Investment A is expected to pay annual cash flows to Sarah of $200 per year with the first annual cash flow expected later today and the last annual cash flow expected in 5 years from today. Investment A has an expected return of 17.40 percent. Bond B pays semi-annual coupons, matures in 19 years. has a face value of $1000, has a coupon rate of 9.80 percent, and pays its next coupon in 6 months. What is the yield-to-maturity for bond B? 5.58% (plus or minus 0.04 percentage points) 6.44% (plus or minus 0.04 percentage points) 5.80% (plus or minus 0.04 percentage points) 2.90% (plus or minus 0.04 percentage points) None of the above is within 0.04 percentage points of the correct answer QUESTION 4 Sarah just borrowed $41,000 to buy an ice cream truck. The terms of the loan require him to make equal regular quarterly payments for 5 years plus an extra payment of $6,000 in 5 years. His first regular quarterly payment is due in 3 months. If Sarah s regular quarterly payment is $2.893.51, then what is the EAR of his loan? 18.21% (plus or minus 0.03 percentage points) 17.08% (plus or minus 0.03 percentage points) 23.20% (plus or minus 0.03 percentage points) 14.909 (plus or minus 0.03 percentage points) None of the above is within 0.03 percentage points of the correct answer

Answer 1

3. Number of Years =5
PMT =200
Rate =17.40%
Value of Investment A =(1+r)*PMT*((1-(!+r)^-n)/r) =(1+17.40%)*200*((1-(1+17.40%)^-5)/17.40%) =744.3515
Price of Bond B =Total Value of Holdings -Value of A =2200-744.3515 =1455.6485

Number of Periods =19*2 =38
Semi annual Coupon =9.80%*1000/2 =49
YTM using financial calculator
N=38;PMT=49;PV=-1455.6485;FV=1000;CPT I/Y =2.90%
YTM =2*2.90% =5.80% (Option c is correct option)

4. Loan Value PV =41000
Number of Periods =5*4 =20
PMT =2893.51
FV =6000
Calculating periodic rate using financial calculator
N=20;PMT=2893.51;PV=-41000;FV=6000;CPT I/Y =4.27%

EAR =(1+4.27%)^4-1 =18.21% (Option a is correct option)