sfb13114-global-markets-and-institutions-20.05.2016

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Østfold University College

Halden

Re-exam: Global Markets and Institutions, spring 2016 Date: May 20, 2016

Duration: 4 hours

Lecturer: Maher Asal Phone: 0046 (0)520 22 36 64 Or : 0046 (0)768 509 002

Instructions

1- You are allowed to have a personal calculator and a dictionary with you. However, notes, books, financial calculator …etc. are NOT ALLOWED

Choose only 4 of the given 5 questions. This exam gives max 80 points, 20 points for each question. To pass the exam you need 40 points:

72 points for an A 64 points for B

56 points for C 48 points for D 40 points for E 2- Be brief and to the point.

Good Luck!

Maher Asal

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Question 1 (20 points) a) 10p

i. Calculate Duration on a $ 1000 Ten-Year 10% Coupon Bond when the market interest rate (discount rate) is 20%.

ii. Use the discounted cash method to calculate the price of the bond.

iii. Calculate the expected price change if interest rates rise to 11 % using the duration approximation.

b) Consider a 30-year, fixed-rate mortgage for 3000,000 NOK at a nominal rate of 6 % compounded monthly.

a. Construct an amortization schedule for the first 6 months. (6p) b. If the borrower wants to pay off the remaining balance on the mortgage after 5 years, what is the remaining balance on the mortgage? (2p) c. If the borrower wants to pay off the remaining balance on the mortgage after 15 years, what is the remaining balance on the mortgage? (2p)

Question 2 (20 points)

a) Assume there are only two stocks traded in the stock market, and you are trying to construct an index to show what has happened to stock prices. Let us say that in the base year the prices were $25 per share for stock 1 with 100 million shares outstanding and $12 for stock 2 with 50 million shares outstanding. A year later, the prices are $32 per share for stock 1 and $8 per share for stock 2. Using the Dow Jones index and the S&P 500 index, compute stock indexes showing what has happened to the overall stock market. Which of the two methods do you prefer and why? 5p

b) You have a credit card with a quoted annual percentage rate of 6.2 %. Interest is applied

to your account monthly (monthly compounding). What is the effective annual rate? 5p

c) You will receive $17,000 a year for the next five years from a trust fund your Father is establishing. What is this gift worth today at 8 % discount rate? 5 p

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d) You want to purchase a new house and you are willing to pay 5 000 000 kr. If you can invest at 6 % per year and you currently have 1 800 000 kr, how long will it be before you have enough money to pay cash for this house? 5p Question 3 (20 points)

a) A security’s price fully reflects all available information in an efficient market. Is this statement true, false, or uncertain? Explain your answer. What are the different forms of market efficiency? How would you test for market efficiency? 5p b) VOLVO Corporation just paid their annual dividend of SEK 4.5 a share. VOLVO’s

policy is to increase the dividend by 3% annually. How much are you willing to pay today for a share of this stock if you require a 12.5% rate of return? 5p c) Consider a coupon bond that has a $1,000 face value and a coupon rate of 10%. The bond is currently selling for $1,217 and has 9 years to maturity. What is the bond’s yield to maturity (YTM)? Explain why would anybody buy this bond; paying today

$1217 to get $1000 9 years later. 5p d) A bond has a 12 % coupon rate, matures in 20 years and pays interest semi-annually. The face value is $1,000. What is the current price of this bond if the market rate of return (e.g. the discount rate) is 8 %? Is this bond is selling at par, premium or discount? What is the current yield? Is the yield to maturity (YTM) for this bond is higher or lower than the current yield?5p

Question 4 (20 points)

Three stocks; A, B and C with the following information:

State Probability Return on stock (A)

Return on stock (B)

Return on stock (C) Boom .55 .12 .16 .18 Recession .45 .09 .06 .04

i. Calculate the expected return for each of these three stocks ii. Calculate the standard deviations for each of these three stocks iii. If you have to choose only one stock, based on expected return and risk, which

stock would you choose?

iv. If the risk-free interest rate is 4%, calculate the risk premium for each stock.

v. Calculate portfolios expected returns and the standard deviation if you invest 40% of your money on stock (A), 30% on stock (b) and 30% on stock (C).

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Question 5 (20 Points)

a) There are at least five primary classes of mutual funds available to investors. Define these five classes. What are the load fund? What distinguishes a hedge fund from other types of mutual funds? 5p b) A zero coupon bond has a par value of $1,000 and matures in 10 years. The bond is selling

for $600 today. What is the yield to maturity for this bond? 5p c) You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity. You plan

on selling the bond in one year and believe that the required yield next year will have the following probability distribution: 10p

Probability Required Yield

0.1 6.60%

0.2 6.75%

0.4 7.00%

0.2 7.20%

0.1 7.45%

a. What is your expected price when you sell the bond?

b. What is the standard deviation?

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M ÔNTHLY C ÔMPOUND I ^NTEREST T ÂBLES

625 A P P E N D I X

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bru5809x_AppB.qxd 7/2/01 3:30 PM Page 625

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626 Appendix B Monthly Compound Interest Tables bru5809x_AppB.qxd 7/2/01 3:30 PM Page 626

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Appendix B Monthly Compound Interest Tables 627

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A ^NNUAL C ^OMPOUND I ^NTEREST T ^ABLES

609 A P P E N D I X

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bru5809x_AppA.qxd 7/2/01 3:34 PM Page 609

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610 Appendix A Annual Compound Interest Tables bru5809x_AppA.qxd 7/2/01 3:34 PM Page 610

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Appendix A Annual Compound Interest Tables 611

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1

Attached Formula collection.

Number of periods:

Future Value for Multiple Cash:

a. Ordinary

– 𝐹𝑉 𝑃𝑀𝑇 1 𝑖 𝑃𝑀𝑇 1 𝑖 𝑃𝑀𝑇 – Annuity

b. Due:

– – Annuity

Present Value for Multiple Cash:

a. Ordinary

– Annuity

b. Due:

Net present Value

Duration

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ln(

ln

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2

Probability distribution

Historical Data

Portfolio for 2 stocks (A & B) and 2 states of the economy (boom & recession) E(R)_P= w _A (E(R)_A+ w _B (E(R)_B

R_{P 1} = w_AR_A + w_BR_B + Boom R_{P 2} = w_AR_A + w_BR_B + … Recession

Bonds valuation

Stocks valuation

𝑃 𝐷

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sfb13114-global-markets-and-institutions-20.05.2016

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A ^NNUAL C ^OMPOUND I ^NTEREST T ^ABLES

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sfb13114-global-markets-and-institutions-20.05.2016

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