FinanceQuestions - Part 1
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Carnegie Mellon University *
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Feb 20, 2024
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Finance Questions
FINANCE QUESTIONS
Imagine I own two bonds. Bond 1 promises to return to me 15 dollars 2 years from now. The bond 2 promises to return to me 20 dollars 3 years from now.
What happens to the value of these two bonds if interest rates rise? (1 points)
Which bond will change in value the most? (1 points)
Consider the following investment decision: I am considering two investment options that are not mutually exclusive
. This means that both of these options can be funded or neither of them might be funded. One has a net present value of 20, the other has a net present value of 50 if my WACC is 5%. If my WACC increases to 7%, the net present values then become 0 and 30. What should I do if my WACC is 5% now? (1 points)
What should I do if my WACC doubles to 10%? How does this change my decision? (1 points)
I am considering two investment choices and I must pick one of them OR Neither of them. I cannot pick both. The first opportunity requires an investment of 50 dollars today and will return 10 dollars per year forever. The other opportunity requires 300 dollars of investment today and will return 30 dollars per year forever.
What should I do if my cost of capital is 10% (1 points)
What should I do if my cost of capital is 5% (1 points)
Given a risk free rate of 2%, a market return of 8%, What is the beta of a portfolio constructed of
these 2 securities
: (1 points)
A. 30% stock 1 with expected return of 8%
B. 70% stock 2 with expected return of 10%
If both the inflation rate doubles, what is the new beta of the portfolio above? (2 points)
(3 Points)
I am considering an investment in a cost reduction technology. There are 2 competing solutions and I know 1 of them will prevail. Right now, each looks equally likely to succeed. I have not skills at all in either of these two technologies. It is estimated that 5 years from now, 1 of the 2 technologies will prevail and result in cost reductions that will result in 1 billion dollars of extra NOPAT that is expected to grow a 2% per year forever.
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What is the most I would be willing to pay today in order to have the option to adopt one of these two technologies in the future?
Assume my WACC is 8% and my Tax rate does not matter since I gave you the NOPAT number above. The value of C dollars per year growing at X% forever = C/(r-x) where r is the expected return on the money.
(3 Points)
I currently run a web services hosting business similar to Amazon Web Services. Web services companies trade in the stock market with a beta of 1.0
I am considering buying an oil drilling supply business. It generates 1 billion dollars of sales with a pretax operating profit of 50%. I pay 20% taxes and my WACC is 10%. The business is not growing but it is not expected to shrink either and the profit margins have been stable for many years. I can buy this business for
2 billion today. Oil drilling companies trade in the stock market with a beta of 2.0
What should I do?
Assume a risk-free rate of return equal to 3%
Assume you have no debt and do not plan to have debt in the future
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Related Questions
Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 18 years. Assume you purchase a bond that costs $100.
a.
What is the exact rate of return you would earn if you held the bond for 18 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.
If you purchased the bond for $100 in 2020 at the then current interest rate of .22 percent year, how much would the bond be worth in 2028? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c.
In 2028, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2038. What annual rate of return will you earn over the last 10 years?
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Suppose the government decides to issue a new savings bond that is guaranteed to double in value if you hold it for 24 years. Assume you purchase a bond that costs $25.
a. What is the exact rate of return you would earn if you held the bond for 24 years until it doubled in value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b. If you purchased the bond for $25 in 2020 at the then current interest rate of 15 percent year, how much would the bond be worth in 2031? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c. In 2031, instead of cashing in the bond for its then current value, you decide to hold the bond until it doubles in face value in 2044. What annual rate of return will you earn over the last 13 years? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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Topic 2: Return measures2. Which of the following investments do you prefer?(a) Purchase a zero-coupon bond, which pays $1000 in ten years, for a price of $550.(b) Invest $550 for ten years in a bank savings account at a guaranteed annual interestrate of 5.5%.1
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Answer? ? Financial accounting question
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After recently receiving a bonus, you have decided to add some bonds to your investment portfolio. You have narrowed your choice down to the following bonds (assume semiannual payments):
a. Using the PRICE function, calculate the intrinsic value of each bond. Is either bond currently undervalued? How much accrued interest would you have to pay for each bond? b. Using the YIELD function, calculate the yield to maturity of each bond using the current market prices. c. Calculate the duration and modified duration of each bond.d. Which bond would you rather own if you expect market rates to fall by 2% across the maturity spectrum? What if rates will rise by 2%? Why?
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Can I get assistance on this question please?
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Suppose the government decides to issue a new savings bond that is guaranteed to
double in value if you hold it for 16 years. Assume you purchase a bond that costs $75.
a. What is the exact rate of return you would earn if you held the bond for 16 years until
b. If you purchased the bond for $75 in 2017 at the then current interest rate of.21
c. In 2025, instead of cashing in the bond for its then current value, you decide to hold
it doubled in value? (Do not round intermediate calculations and enter your answer
as a percent rounded to 2 decimal places, e.g., 32.16.)
percent year, how much would the bond be worth in 2025? (Do not round
intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
the bond until it doubles in face value in 2033. What annual rate of return will you
earn over the last 8 years? (Do not round intermediate calculations and enter your
answer as a percent rounded to 2 decimal places,e.g..32.16.)
a. Rate of return
b. Value of bond
c. Rate…
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Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000.
Maturity (Years)
1
2
3
4
5
Show Transcribed Text
B) How could you construct a 1-year forward loan beginning in year 3? (Face Value)
C) How could you construct a 1-year forward loan beginning in year 4? (Face Value)
Required A Required B
Complete this question by entering your answers in the tabs below.
Face value
Rate of synthetic loan
→ Show Transcribed Text
Price
$ 970.93
898.39
836.92
How could you construct a 1-year forward loan beginning in year 3?
Note: Round your Rate of synthetic loan answer to 2 decimal places.
Required A
776.20
685.42
Required B
Face value
Rate of synthetic loan
Required C
7.85 %
Required C
How could you construct a 1-year forward loan beginning in year 4?
Note: Round your Rate of synthetic loan answer to 2 decimal places.
Ċ
13.29 %
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Consider two bonds, S and T. Both bonds presently are selling at their par value of $100. Bond S will mature in 5 years whereas Bond T will mature in 6 years. If interest rates change such that the yield to maturity on both bonds goes from 6% to 8%, then ____________.
Group of answer choices
A) Both bonds will decrease in value but bond T will decrease more than bond S
B) Both bonds will decrease in value but bond S will decrease more than bond T
C) Both bonds will increase in value but bond S will increase more than bond T
D) Both bonds will increase in value but bond T will increase more than bond S
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More time value of money practice problems. How would you solve these using a financial calculator? What values would you enter for N, I/YR, PV, PMT, and FV ?
Alternatly, how would you solve this using MS Excel ? (please show formulas)
*assume corporate bonds pay 2x annually and have a FV on $1000
a) What is the PV of a 25-year corporate bond issued 8 years ago paying 5.75% when similar bonds today pay a 4.75%? What is the current yield?
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You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $1.4 million per year. The interest rate is 8%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.Required:
a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position?
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3
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You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund
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obligation using 5-year and 20-year maturity zero-coupon bonds.
Required:
a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not
round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.)
Five-year
Twenty-year
Market Value
million
million
b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your
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Five-year
Twenty-year
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You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $2.1 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.Required:
a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.)
Market Value
Five year:
Twenty year:
b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.)
Face Value
Five year:
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You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are
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5-year and 20-year maturity zero-coupon bonds.
Required:
a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position?.
Five-year
Twenty-year
Market Value
Five-year
Twenty-year
million
million
b. What must be the face value of each of the two zeros to fund the plan?
Face Value
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a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.)
Market Value
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Twenty-Five Year ___ Million
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Suppose for $1,000 you could buy a 10%, 10-year, annual payment bond or a 10%, 10-year, semiannual payment bond. They are equally risky. Which would you prefer? If $1,000 is the proper price for the semiannual bond, what is the equilibrium price for the annual payment bond?
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Stepwise with all formulas and concept
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An investment firm recommends that a client invest in bonds rated AAA, A, and B. The average yield on AAA bonds is
4%,
on A bonds
6%,
and on B bonds
11%.
The client wants to invest twice as much in AAA bonds as in B bonds. How much should be invested in each type of bond if the total investment is
$28,000,
and the investor wants an annual return of
$1,740
on the three investments?
Question content area bottom
Part 1
The client should invest
$enter your response here
in AAA bonds,
$enter your response here
in A bonds, and
$enter your response here
in B bonds
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An investor is presented with the following two alternative investment strategies: purchase a 3-year bond with an interest rate of 6% and hold it until maturity or, purchase a 1-year bond with an interest rate of 7%, and when it matures, purchase another 1-year bond with an expected interest rate of 6%, and when it matures, purchase another 1-year bond with an interest rate of 5%.
What is the expected return of the first strategy?
What is the expected average return over the 3-years for the second strategy?
Why does our anayses of the expectations theory indicate that this is exactly what you should expect to find?
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