Problems
1.The following table lists foreign exchange rates between US dollars and British pounds during April.
Date
US Dollars per GBP
Date
US Dollars per GBP
4/1
1.9564
4/18
1.7504
4/4
1.9293
4/19
1.7255
4/5
1.914
4/20
1.6914
4/6
1.9374
4/21
1.672
4/7
1.961
4/22
1.6684
4/8
1.8925
4/25
1.6674
4/11
1.8822
4/26
1.6857
4/12
1.8558
4/27
1.6925
4/13
1.796
4/28
1.7201
4/14
1.7902
4/29
1.7512
4/15
1.7785
Which day would have been the best day to convert $200 into British pounds?
Which day would have been the worst day? What would be the difference in pounds?
2.Consider a bond with a 7% annual coupon and a face value of $1,000. Complete the following table:
Years to Maturity
Discount Rate
Current Price
3
5
3
7
6
7
9
7
9
9
What relationship do you observe between yield to maturity and the current market value?
3.You are willing to pay $15,625 now to purchase a perpetuity which will pay you and your heirs $1,250 each year, forever, starting at the end of this year. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity instead of a perpetuity?
4.A bank has two, 3-year commercial loans with a present value of $70 million. The first is a $30 million loan that requires a single payment of $37.8 million in 3 years, with no other payments until then. The second is for $40 million. It requires an annual interest payment of $3.6 million. The principal of $40 million is due in 3 years.
a.What is the duration of the bank’s commercial loan portfolio?
b.What will happen to the value of its portfolio if the general level of interest rates increased from 8% to 8.5%?
5.Consider a bond that promises the following cash flows. The required discount rate is 12%.
Year
0
1
2
3
4
Promised Payments
160
170
180
230
You plan to buy this bond, hold it for 2? years, and then sell the bond.
a.What total cash will you receive from the bond after the 2? years? Assume that periodic cash flows are reinv
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