What is the bond equivalent yield on this investment

Directions: Please answer each question completely. It is possible to get partial credit when the
grader can’t follow your methodology to reach the answer you submit, therefore you MUST show
your work. Please answer money questions to the .01 level (i.e. penny for $s), and % answers to
the nearest basis point. Assume all bonds have a face value of $1,000.00, unless otherwise
informed. SHOW YOUR WORK!

1. A 90 day T-Bill is selling for $9,915. The par is $10,000.
a. [3] What is the discount rate (discount yield) on this T-Bill?

b. [2] What is the bond equivalent yield on this investment?

c.

2.

[3] What is the effective annual rate on this investment?

[5] A 10 year semi-annual payment corporate coupon bond has a coupon rate of 8.5%
and a required return of 10%. The bond's market price is

3. [5] Suppose we look in the newspaper and find the following rates: the rate on 1-year
securities is 4.65%, on a similar 2-year security 6.24%, and a 3-year security 6.67%. If
the unbiased expectations theory of the term structure of interest rates holds, what is the
one-year interest rate expected one year from now?

4. Consider the following bonds:
a. [7] What is the duration of a five-year bond with a 6.5 percent semiannual coupon
if the yield to maturity (ytm) is 7.125%?

b. [3] What is the duration of a 20-year zero coupon bond with a yield to maturity of
7.625%

c.

[2] You expect a sudden, but widely unanticipated, increase in the market rates of
interest due to a change in position by the Federal Reserve. Would you rather be
holding in your asset portfolio the bond from a. above (BOND A) or the zero from
b. above (BOND B)? Which bond would you prefer, and why?

Created by B. Scott

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5. [3] If a $10,000 par T-Bill has a 4.25% asked discount yield quote and a 180 day maturity,
what is the price of the T-Bill?

6. [6] Ninety day commercial paper can be bought at a 4.875% discount. What are the
bond equivalent yield and the effective annual rate on the commercial paper?

a.

[2] Why do these rates differ?

7. [4] You purchase a $200,000 house and you pay 20% down. You obtain a fixed rate
mortgage where the annual interest rate is 6.375% and there are 360 monthly payments.
What is the monthly payment?

8. [4] You want to be a millionaire when you retire in 40 years. You believe you can earn 8%
per year on your investment. How much must you put away each year to achieve your
goal when you retire? (Ignore all taxes)

9. [6] A Swiss bank converted 1.2 million Swiss francs to euros to make a euro loan to a
customer when the exchange rate was 1.75 francs per euro. The borrower agreed to
repay the principle plus 4% interest in 1 year. The borrower repaid euros at loan maturity
and when the loan was repaid the exchange rate was 1.85 francs per EURO. What was
the bank's franc rate of return?

Created by B. Scott

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10. [5] You can buy or sell the £ spot at $1.60 to the pound. You can buy or sell the pound 1
year forward at $1.62 to the pound. If U.S. annual interest rates are 4%, what must be
the one year British interest rate if interest rate parity holds?.

11. [4] A stock has a spot price of $35. Its May options are about to expire. One of its puts is
worth $5 and one of its calls is worth $5. The exercise price of the put must be ___A__
and the exercise price of the call must be ___B__. (please show work for A & B)

12. [2] Why do mortgage lenders prefer ARMs while many borrowers prefer fixed rate
mortgages, ceteris paribus?

Created by B. Scott

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