11. If you can get an 8% return (annual effective) on a ten year CD from your l
ID: 2800505 • Letter: 1
Question
11. If you can get an 8% return (annual effective) on a ten year CD from your local bank, would it be wise to invest in a 10 year bond which promises to make a single payment of $1000 at the end of its life? (Assume both are equally risky). This bond costs $475 now and will pay $1000 in ten years. 4
(a) Yes, the bond is better. (b) No, the bond is worse. (c) Can’t tell from information given
12. You are given the following information about portfolios of two risky assets, A and B: Weight in A Weight in B Std.dev. of portfolio 0 1 12 0.5 0.5 14 1 0 16 What is the covariance between A and B?
(a) 192%2 (b) 168%2 (c) 224%2 (d) Cannot be determined
13. A ï¬rm in a well-functioning capital market has the following projects available. The risk-free rate is 10%. Which should it invest in? NPV IRR X 10 15% Y 0.1 3% Z -5 22% OCC 22% 5% 6%
(a) X only (b) Z only (c) X and Y (d) X and Z (e) All three
Explanation / Answer
11.
Find the present value of the payment
PV = FV/(1+r)^n
PV - Present value
FV - Future value
r - Interest rate
n - no. of periods
PV = 1000/(1+0.08)^10 = 463.19
But the present value of the bond is $475.
So, the bond is worse. Option b.
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