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ACADEMY OF BANK
DEPARTMENT OF FINANCE
SYLLABUS
45 hours
1:
2:
3:
4:
5:
6:
7:
Chapter 1.
1. You have concluded that next year the following relationship are possible:
Economic status
Weak economy
Static economy
Strong economy
Probability
0.15
0.60
0.25
Rate of Return
-5%
5%
15%
What is your expected rate of return E(R) for the next year. Compute the
standard deviation of the rate of return for the one year period. Compute the
coefficient of variation for your portfolio.
Solution: E(R) = 6%, = 6.25%, CV = 1.04
2. Assume that you hold a two stock portfolio. You are provided with the
following information on your holdings.
Stock
Shares
Price(t)
Price (t + 1)
1
15
10
12
2
25
15
16
Calculate the HPY for stock 1 and stock 2. Calculate the market weights for
stock 1 and 2 based on period t values. Calculate the HPY for the portfolio.
Solution: HPR1 = 1.2, HPY1 = 20%, HPR2 = 1.07, HPY2 = 7%; Market weight:
29%, 71%; Portfolio HPY = 10%
3. Based on the following stock price and shares outstanding information,
compute the beginning and ending values for a price-weighted and a
market-value-weighted index
4.
December 31, 2005
December 31, 2006
Price
Shares
Price
Shares
Outstanding
outstanding
Stock A
20
100,000,000
32
100,000,000
Stock B
80
2,000,000
45
4,000,000*
Stock C
40
25,000,000
42
25,000,000
*Stock split two-for-one during the year.
a. Compute the percentage change in the value of each index.
b. Explain the difference in results between the two indexes.
c. Compute the percentage change for an un-weighted index and discuss
why these result differ from those of the other indexes.
Solution: a. 1.401, ////
5. You are considering two assets with the following characteristics.
E(Ri) = 0.15, E(1) = 0.10, w1 = 0.5
E(R2) = 0.20, (1) = 0.20. w2 = 0.5
Compute the mean ah standard deviation of two portfolio if r 1,2 = 0.40 and
-0.60, relatively. Plot the two portfolio on a risk return graph and briefly
explain the results.
Chapter 5.
Companies
Number of
shares
outstanding
2,000
6,000
3,000
4,000
1
2
3
4
Closing prices
Day T
Close prices
Day T + 1
30.00
55.00
22.5
40.00
35.00
50.00
25
42.50
Jan, 13,2000
Jan, 14,2000
Jan, 15, 2000
X
25
25
27
Y
40
42
42
Z
30
7
8
14
44
10
Chapter ////
2
Number of
shares
X
Y
Z
1000
2000
1000*
1000
2000
5000
1000* 2000
5000
*
2000
2000
5000
c. 13.14%
d. 14.18%
Chapter ///
1. Assume that you purchased an 8 percent, 20 year, $ 1,000 par,
semiannual payment bond price at $1,012 when it has 12 years
remaining until maturity. Compute:
a. Its promised yield to maturity
b. B, Its yield to call if the bond is callable in three years with 8 percent
premium.
Solution: a = 7.8374, b = 9.86% , 8.91 ? (instruction: FV = 1080///)
2. Calculate the duration of an 8 percent, $1,000 par bond that matures
in three years if the bonds YTM is 10 percent and interest is paid
semiannually.
a. Calculate this bonds modified duration.
b. Assuming the bonds YTM goes from 10% percent to 9.5%, calculate an
estimate of the price change.
Solution: a = 2,65%; b = increase 1.32%
TEST
1. Considering a floating rate issue that has a coupon rate that is reset on
1 January of each year. The coupon rate id defined as one-year LIBOR
+ 100 basis points and the coupon are paid semi-annually. If the oneyear LIBOR is 7.5% on January 1st, which of the following of the semiannual coupon payment received by the holder of the issue in that
year ?
a. 8.500%
b. b. 3.875%
c. c. 4.250%
d. 7.750%
2. An analyst is considering two bonds: Bond X yield 7.2% and bond Y
yields 6.3%. Using bond Y as the reference bond, the absolute yield
spread and yield ratio respectively are
a. 0.9%; 1.143
b. -0.9%; 1.143
c. 0.9%; 0.875
d. -0.9%; 0.875
Solution: a
3. Which of the following statements is True with regard to a call
provision on a bond?
a. A call provision is an advantage to the bondholder.
b. A call provision will benefit the issuer in times of declining interest
rates.
c. A call provision is a disadvantage to the bondholder in periods of rising
interest rates.
d. An issue with a call provision will trade at a higher price than an
indentical issue with no call provision.
Solution: b
a. 4.5%; 5.94%
b. 10.2%; 5.94%
c. 4.5%; 7.25%
d. 10.2%; 5.73%
Solution: b
9. ABC Corp. has $200 million, 7% coupon bond that is refund protected
until September, 1 2014. This issue:
a. Currently may be redeemed but only if refunded by an issue
with a lower cost
b. Is call protected until September 1, 2004
c. Is non-callable
d. Currently may be redeemed as long as the funds are not
acquired by reissue of the bond at lower rate.
Solution: a
10.The interest rate risk of a bond normally is
a. Greater for shorter maturities.
b. Lower for longer duration
c. Lower for higher coupons
d. None of the above.
Solution: c
11.Which of the following embedded options in bonds benefit the
borrower?
a. Put option
b. Floor
c. Convertible provision
d. Accelerated sinking fund provision
Solution: a
12.Which of he following applies to an on-the run Treasury issue? An onthe-run issue is:
a. A short-term Treasury security
b. The most recently issued Treasury securities
c. The most widely held Treasury securities
d. A bond that is alive rather than having matured already.
Solution: b
13.Assume the following yields for different bond issues by a corporation.
- One-year rate: 5.50%
- Two-year rate: 6.00%
- Three-year rate: 7.00%
If the on-the-run three year U.S. Treasury is yielding 6 percent, then what
is the absolute yield spread on the three-year corporate issue?
a. 0.40
b. 1.40
c. 100bp
d. 200bp
Solution: c
14.All maturities are exact. You observe a ABC 5 1 /8 percent, 5 year
semiannual coupon bond trading at 107.245 percent of par. The bond
is callable at 104 in 4 years, and is putable at 100 in 3 years. What is
the yield-to-maturities, yield-to-call and yield-to-put respectively?
a. 2.930%; 3.45%; 4.33%
a.
b.
c.
d.
I
1.
2.
3.
4.
5.
6.
7.
8.
Please note that each question may have many parts. Answer each part to
get the maximum points.
1. Match the best choice in column II to the word or phrase in column I
(15 points)
II
Investment Banker
a. Maintain orderly market
Efficient market
b. Dealers market
Organized exchange
c. Computer quotation
Registered trader
d. Direct Institutional trade
Specialists
e. 10,000 shares or more
Option market
f. AMEX
OTC
g. Original purchase market
Ask price minus bid
h. Trade for your own account
9. NASDAQ
10. Third market
11. Fourth market
12. Block trades
13. SIPC
14. Primary market
i. Spread
j. underwriting
k. Insures investors account
l. quick price response
m. CBOE
n. OCT trades of NYSE securities
Solution: 1-j, 2-l, 3-f, 4-h, 5-a, 6-m, 7-b, 8-I, 9-c, 10-n, 11-d, 12-e, 13-k, 14-g
2a. Discuss how the individuals investor strategy may change as he or
she goes through the accumulation, consolidation, spending and gifting
phases of life. Draw a labeled diagram (10 points)
2b. Suppose you bay a stock for $37 and one year later you sell it for $45.
You received $2.25 in dividends during the year. Find your HPR and HPY (5
points)
3. Bill had a margin account with an equity balance of $5,000. If initial
margin requirements are 60 percent and Butler Industries is currently
selling at $45 per share: (10 points)
a. How many shares of Butler can Bill purchase?
b. What is Bills profit if Butlers price rises to $65?
c. If the maintenance margin is 40 percent, to what price can Butler
industry fall before Bill receives a margin call.
4a. Define market and briefly discuss the characteristics of a good market.
(5 points)
4b. Define a primary and secondary market for securities and discuss how
they differ. Discuss how the primary market is dependent on the
secondary market. (5 points)
4. The following are the monthly rates of return for the Microsoft and for
General Electric during a four month period. (10 points)
Month
Microsoft
General Electric
1
-0.04
0.07
2
0.06
-0.02
3
-0.07
-0.10
4
0.12
01.5
Compute the following:
a. Expected monthly rate of return for each stock.
b. Standard deviation of return for each stock.
5. You are given the following information regarding prices for a sample
of stocks: (5 points)
Stock
Number of
Price (t)
Price
share
(t+1)
A
1,000
60
80
B
10,000
20
35
C
30,000
18
25
a. Construct a price-weighted series for these three stocks, and compute
the percentage change in the series for the period from t to t + 1.
Solution: a) 13,500; b) 0
7. A US company has entered into in interest rate swap with a dealer in
which the notional principal is $ 10 million. The company will pay a
floating rate of LIBOR and receive a fixed rate of 6.25 percent. Interest
is paid semiannually, and the current LIBOR is 6.00 percent. Calculate
the first payment and indicate which party pays to whom. Assume that
floating rate payment will be made on the basis of 180/360 and fixedrate payments will be made on the basis of 180/356
Derivatives
1. A put on A stock with a strike of $ 35 is priced at $2 per share while a
call with a strike price of $ 35 is priced at $ 3.50. The maximum per
share loss to the writer of an uncovered put ____________and the
maximum per share gain to the writer of an uncovered call ___________
a. $ 33.00 ; $3.50
b. $30.00: 31.50
c. $35.00; $3.50
d. $35.00: $35.00
Solution: a
2. The current level of the S&P 500 is 550. The dividend yield on the S&P
500 is 3%. The risk-free interest rate is 6%. The future price for a
contract on the S&P 500 due to expire 6 months from now should
be_______
a. $541.69
b. $558.31
c. $566.50
d. $583.00
Solution: b
3. You buy a call option and a put option on GE. Both the call option and
the put option have the same exercise price and expiration date. The
strategy is called a _______
a. Horizontal spread
b. Long straddle
c. Short straddle
d. Vertical spread
4. The stock price of GE is $31 today. The risk-free rate of return is 6%
and GE pays no dividends. A put option on GE stock with an exercise
price of $30 and an expiration date six months from now is worth
$2.14 today. A call option on GE stock with an exercise price of $30
and expiration date six months from now should be_______ worth
today.
a. $2.25
b. $3.14
c. $4.00
d. $4.84
5. A future contract________
a. is a contract to be signed in the future by the buyer and the seller of a
commodity