Quiz 1

FME04 – Security Analysis Quiz 1
Prof. Camille A. Bagadiong, MBA
1. If the stated annual interest rate is 9% and the frequency of compounding is daily, the
effective annual rate (EAR) is :
EAR = (1 + periodic interest rate)m – 1 = [1 + (0.09/365)]365 – 1 = 0.094162,

rounded to 9.42%.
2. The dollar discount on a US Treasury bill with 91 days until maturity is $2,100. The face
value of the bill is $100,000. The bank discount yield of the bill is: (Use 360 Days)
rBD = (D/F) × (360/t)
rBD = (2,100/100,000) × (360/91)

= 0.083077 ~ 8.31%.
3. A company’s dividend in 1995 was $0.88. Over the next eight years, the dividends were
0.91, 0.99, 1.12, 1.09, 1.25, 1.42, and 1.26. Calculate the annually compounded growth
rate of the dividend over the whole period.
4. The Park Plans to take three cruises, one each year. They will take their first cruise 9
years from today, the second cruise one year after that, and the third cruise 11 years from
today. The type of cruise they will take currently costs $5,000, but they expect inflation
will increase this cost by 3.5% per year on average. They will contribute to an account to
save for these cruises that they will earn 8% per year. What equal contributions must they
make today and every year until their first cruise (ten contributions) in order to have
saved enough at the time for all three cruises? They pay for cruises when taken.
The Parks plan to take three cruises, one each year. They will take their first cruise
9 years from today, the second cruise one year after that, and the third cruise 11
years from today. The type of cruise they will take currently costs $5,000, but they
expect inflation will increase this cost by 3.5% per year on average. They will
contribute to an account to save for these cruises that will earn 8% per year. What
equal contributions must they make today and every year until their first cruise (ten
contributions) in order to have saved enough at that time for all three cruises? They
pay for cruises when
taken.
Our suggested solution method is:
cost of first cruise = 5,000 × 1.0359

PV = 6,814.49
5. A bond with two years remaining until maturity offers a 3% coupon rate with interest
paid annually. At a market discount rate of 4%, the price of this bond per 100 of par value
is:
6. The following information below relates to Fixed-Income Valuation:
Bond Coupon Rate Time-to-Maturity Time-to-Maturity Rates

X 8% 3 Years 1 year 8%
Y 7% 3 Years 2 years 9%
Z 6% 3 Years 3 Years 10%
a. Based upon the given sequence of spot rates, the price of Bond X is:
PV = 7.41 + 6.73 + 81.14 = 95.28

b. Based upon the given sequence of spot rates, the price of Bond Y is:
c. Based upon the given sequence of spot rates, the yield-to-maturity of Bond Z is
YTM: 9.92%
7. A two-year floating-rate note pays 6-month Libor plus 80 basis points. The floater is
priced at 97 per 100 of par value. Current 6-month Libor is 1.00%. Assume a 30/360 day-
count convention and evenly spaced periods. The discount margin for the floater in basis
points (bps) is:
The discount or required margin is 236 basis points. Given the floater has a maturity of
two years and is linked to 6-month Libor, the formula for calculating discount margin is:
8. Bond G, described in the exhibit below, is sold for settlement on 16 June 2014.
Annual Coupon: 5%
Coupon Payment Frequency: Semiannual
Interest Payment Dates: 10 April and 10 October
Maturity Date: 10 October 2016
Day Count Convention 30/360
Annual Yield-to-Maturity 4%
a. What is the full price of Bond G that will settle at on 16 June 2014?
The bond’s full price is 103.10. The price is determined in the following
manner:
As of the beginning of the coupon period on 10 April 2014, there are 2.5 years
(5 semiannual periods) to maturity. These five semiannual periods occur on 10
October 2014, 10 April 2015, 10 October 2015, 10 April 2016 and 10 October
2016.
b. What is the accrued interest per 100 of par value for Bond G on the settlement date
of 16 June 2014?
The accrued interest per 100 of par value is 0.92. The accrued interest is
determined in the following manner: The accrued interest period is identified
as 66/180. The number of days between 10 April 2014 and 16 June 2014 is 66
days based on the 30/360 day count convention. (This is 20 days remaining in
April + 30 days in May + 16 days in June = 66 days total). The number of
days between coupon periods is assumed to be 180 days using the 30/360 day
convention.
c. What is the flat price for Bond G on the settlement date of 16 June 2014?
The flat price of 102.18 is determined by subtracting the accrued interest (from
question 20) from the full price (from question 19).
PVFlat = PVFull – Accrued Interest

PVFlat = 103.10 – 0.92 = 102.18

Quiz 1

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FME04 – Security Analysis Quiz 1

Prof. Camille A. Bagadiong, MBA

EAR = (1 + periodic interest rate)m – 1 = [1 + (0.09/365)]365 – 1 = 0.094162,

rBD = (D/F) × (360/t)

rBD = (2,100/100,000) × (360/91)

Our suggested solution method is:

cost of first cruise = 5,000 × 1.0359

6. The following information below relates to Fixed-Income Valuation:

Bond Coupon Rate Time-to-Maturity Time-to-Maturity Rates

PV = 7.41 + 6.73 + 81.14 = 95.28

PVFlat = PVFull – Accrued Interest

PVFlat = 103.10 – 0.92 = 102.18

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