Finance 301 Sample Final Exam

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Question 1 - Bond Valuation Assume the following information for bonds A and B. Both bonds have the same YTM and have semi-annual coupon payments. Bond B is currently selling at par. Face Value Maturity Coupon Rate Bond A 1000 30 yrs 8% Bond B 1000 20 yrs 10% a) What is the price for Bond B (2 pts)? What is the current yield for Bond B (2 pts)? Bond A is selling at a ________(discount /par/ premium) (2 pts). b) Suddenly interest rates rise by 2%. The price of bond A will go________ (up/down) (2 pts). c) The percentage change in the price of Bond B (in absolute value) will be _________ (smaller/bigger) than that of Bond A (in…show more content…
( 3 + 3 pts) b) What is the expected return on an asset with a beta 1.6? (4 pts) c) What is the beta on a portfolio consisting of 30% XYZ, 30% ABC, 20% risk free asset and 20% market portfolio? (5 pts) d) If a security has beta 1.8 and expected return 18%, is this security above or below SML? Over or under priced? ( 2 + 3 pts) Solution: a) Here we have the expected return and beta for two assets. We can express the returns of the two assets using CAPM. If the CAPM is true, then the security market line holds as well, which means all assets have the same risk premium. Setting the reward-to-risk ratios of the assets equal to each other and solving for the risk-free rate, we find: (.15 – Rf)/1.4 = (.115 – Rf)/.90 .90(.15 – Rf) = 1.4(.115 – Rf) .135 – .9Rf = .161 – 1.4Rf .5Rf = .026 Rf = .052 or 5.20% Now using CAPM to find the expected return on the market with both stocks, we find: .15 = .0520 + 1.4(RM – .0520) .115 = .0520 + .9(RM – .0520) RM = .1220 or 12.20% RM = .1220 or 12.20% b) 5.20% + 1.6 (12.20% – 5.20%) = 5.20% + 11.20% = %16.40 c) 0.30 * 1.4 + 0.30*0.9 + 0.2*1 +0.2*0 = 0.89 d) According to SML 5.20% + 1.8 (12.20% - 5.20%) = 5.20% + 12.60% = 17.80%. The security is above SML. It is underpriced. Question 5 1). For a multi-product firm, if a project 's beta is different from

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