University of Calgary FNCE 465 | Final Exam key, Complete 100% updated 2025.

Chapter 12: Bond Prices and Yields 1. (EOC Q36a) An investment in a coupon bond will provide the investor with a return equal to the bond's yield to maturity at the time of purchase if A. The bond is not called for redemption at a price that exceeds its par value. B. All sinking fund payments are made in a prompt and timely fashion over the life of the issue. C. The reinvestment rate is the same as the bond's yield to maturity and the bond is held until maturity. D. All of the above. 2. (EOC Q36c) A bond with a call feature A. Is attractive because the immediate receipt of principal plus premium produces a high return B. Is more apt to be called when interest rates are high because the interest saving will be greater C. Will usually have a higher yield than a similar noncallable bond D. None of the above 3. (EOC Q6) Consider an 8 percent coupon bond selling for $953.10 with three years until maturity making annual coupon payments. The interest rates in the next three years will be, with certainty, r1 = 8 percent, r2 = 10 percent, and r3 = 12 percent. • Calculate the yield to maturity and realized compound yield of the bond. We find the yield to maturity from our financial calculator using the following inputs: Chapter 13 The Term Structure of Interest Rates 4. According to the expectations hypothesis, a normal yield curve implies that A) interest rates are expected to remain stable in the future. B) interest rates are expected to decline in the future. C) interest rates are expected to increase in the future. D) interest rates are expected to decline first, then increase. E) interest rates are expected to increase first, then decrease. 5. According to the "liquidity preference" theory of the term structure of interest rates, the yield curve usually should be: a. inverted. b. normal. c. upward sloping. d. a and b. e. b and c. 6. (EOC Q7) Which of the following is true according to the pure expectations theory? Forward rates a. Exclusively represent expected future spot rates b. Are biased estimates of market expectations c. Always overestimate future short rates The pure expectations theory, also referred to as the unbiased expectations theory, purports that forward rates are solely a function of expected future spot rates. Under the pure expectations theory, a yield curve that is upward-(downward-)sloping, means that short-term rates are expected to rise (fall). A flat yield curve implies that the market expects short-term rates to remain constant. 7. Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of 3-year zero coupon bond with a par value of $1,000? A) $863.83 B) $816.58 C) $772.18 D) $765.55 E) none of these 8. (EOC Q12) The yield to maturity on one-year zero-coupon bonds is currently 7 percent; the YTM on two-year zeroes is 8 percent. The federal government plans to issue a two- year-maturity coupon bond, paying coupons once per year with a coupon rate of 9 percent. The face value of the bond is $100. • At what price will the bond sell? Chapter 14 Managing Bond Portfolios 9. Which of the following bonds has the longest duration? A) An 8-year maturity, 0% coupon bond. B) An 8-year maturity, 5% coupon bond. C) A 10-year maturity, 5% coupon bond. D) A 10-year maturity, 0% coupon bond. E) Cannot tell from the information given. The duration of a coupon bond A) does not change after the bond is issued. B) can accurately predict the price change of the bond for any interest rate change. C) will decrease as the yield to maturity decreases. D) all of these are true. E) none of these are true. Scrambling: Locked 10. An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in A) a rate anticipation swap. B) immunization. C) horizon analysis. D) an intermarket spread swap. E) none of these. Scrambling: Locked 11. Par value bond F has a modified duration of 9. Which one of the following statements regarding the bond is true? a. If the market yield increases by 1% the bond's price will decrease by $90. b. If the market yield increases by 1% the bond's price will increase by $90. c. If the market yield increases by 1% the bond's price will decrease by $60. d. If the market yield decreases by 1% the bond's price will increase by $60. e. None of these is true. Scrambling: Locked 12. The duration of a par value bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is A) 6.0 years. B) 5.1 years. C) 4.27 years. D) 3.95 years. E) None of the options Feedback: Calculations are shown below. Chapter 15 Macroeconomic and Industry Analysis Q11EOC 13. Here are four industries and four forecasts for the macroeconomy. Match the industry to the scenario in which it is likely to be the best performer. Industry a. Housing construction 3 b. Health care 1 c. Gold mining 4 d. Steel production 2 Economic Forecast 1. Deep recession. Falling inflation, falling interest rates, falling GDP 2. Superheated economy. Rapidly rising GDP, increasing inflation and interest rates 3. Healthy expansion. Rising GDP, mild inflation, low unemployment 4. Stagflation. Falling GDP, high inflation a. Housing construction (cyclical but interest-rate-sensitive): (iii) Healthy expansion b. Health care (a noncyclical industry): (i) Deep recession c. Gold mining (countercyclical): (iv) Stagflation d. Steel production (cyclical industry): (ii) Superheated economy 14. is a proposition that a strong proponent of supply side economics would most likely stress. A) Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates as they depend on government revenues. B) Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output as they encourage investors to undertake low productivity projects with substantial tax shelter benefits C) Income redistribution payments will exert little impact on real aggregate supply as they do not consume resources directly. D) A tax reduction will increase the disposable income of households, and thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus. E) None of these are likely statements for a supply-side proponent. 15. Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50 cents per widget. Firm B has total fixed costs of $240,000 and variable costs of 75 cents per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. If the economy is strong, the after-tax profit of Firm B will be . A) $0 B) $6,000 C) $36,000 D) $60,000 E) none of these Scrambling: Locked Chapter 16 Equity Evaluation Models EOC Q24 16. Helen Morgan, CFA has been asked to use the DDM to determine the value of Sundanci, Inc. Morgan anticipates that Sundanci's earnings and dividends will grow at 32 percent for two years and 13 percent thereafter. • Calculate the current value of a share of Sundanci stock by using a two-stage dividend discount model and the data from Tables 16A and 16B) TABLE 16A Sundanci Actual 2012 and 2013 Financial Statements for Fiscal Years Ending May 31 ($ million, except per-share data) TABLE 16B Selected Financial Information Christie Johnson, CFA has been assigned to analyze Sundanci using the constant dividend growth price/earnings (P/E) ratio model. Johnson assumes that Sundanci's earnings and dividends will grow at a constant rate of 13 percent. a. Calculate the P/E ratio based on information in Tables 16A and 16B and on Johnson's assumptions for Sundanci b. Identify, within the context of the constant dividend growth model, how each of the following factors would affect the P/E ratio. 1. Risk (beta) of Sundanci 2. Estimated growth rate of earnings and dividends 3. Market risk premium Using a two-stage dividend discount model, the current value of a share of Sundanci is calculated as follows. V0 = D1 (1 + k)1 + D2 (1 + k)2 D3 (k - g) + (1 + k)2 $0.5623 =$0.3770 + $0.4976 + (0.14 - 0.13) =$43.98 1.141 where E0 = $.952 D0 = $.286 1.142 1.142 E1 = E0 (1.32)1 = $.952 × 1.32 = $1.2566 D1 = E1 × .30 = $1.2566 × .30 = $.3770 E2 = E0 (1.32)2 = $.952 × (1.32)2 = $1.6588 D2 = E2 × .30 = $1.6588 × .30 = $.4976 E3 = E0 × (1.32)2 × 1.13 = $.952 × (1.32)3 × 1.13 = $1.8744 D3 = E3 × .30 = $1.8743 × .30 = $.5623 Chapter 17 Financial Statement Analysis 17. [EOC Q31] The Du Pont formula defines the net return on shareholders’ equity as a function of the following components: o Operating margin o Asset turnover o Interest burden o Financial leverage o Income tax rate Using only the data in Table 17H, TABLE 17H Income Statements and Balance Sheets ($ millions) a. Calculate each of the five components listed above for 2013 and 2014, and calculate the return on equity (ROE) for 2013 and 2014, using all of the five components. b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the change in ROE from 2013 to 2014. 2013 2014 (1) Operating margin = 38 - 3 =6.5% 542 76 - 9 =6.8% 979 (2) Asset turnover = (3) Interest burden = (4) Financial leverage = (5) Tax burden ratios = Using the Du Pont formula: ROE = [1.0 – (5)] × (3) × (1) × (2) × (4) ROE(2013) = .5937 × .914 × .065 × 2.21 × 1.54 = .120 = 12.0% ROE(2014) = .4478 × 1.0 × .068 × 3.36 × 1.32 = .135 = 13.5% (Because of rounding error, these results differ slightly from those obtained by directly calculating ROE as net income/equity.) b. Asset turnover measures the ability of a company to minimize the level of assets (current or fixed) to support its level of sales. The asset turnover increased substantially over the period, thus contributing to an increase in the ROE. Financial leverage measures the amount of financing other than equity, including short and long-term debt. Financial leverage declined over the period, thus adversely affecting the ROE. Since asset turnover rose substantially more than financial leverage declined, the net effect was an increase in ROE. Chapter 18 Options Introduction 18. You purchased one BCE March 50 call and sold one BCE March 55 call. Your strategy is known as A) a long straddle. B) a horizontal spread. C) a vertical spread. D) a short straddle. E) none of these. Scrambling: Locked 19. You purchase one XYZ March 100 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy? Assuming each contract has 100 units. A) $10,000 B) $10,600 C) $9,400 D) $9,000 E) none of these Scrambling: Locked 20. Some more "traditional" assets have option-like features; some of these instruments include A) callable bonds. B) convertible bonds. C) warrants. D) a and b. E) a, b, and c. Scrambling: Locked Chapter 19 Option Valuation 21. You are evaluating a stock that is currently selling for $30 per share. Over the investment period you think that the stock price might get as low as $25 or as high as $40. There is a call option available on the stock with an exercise price of $35. Answer the following questions about hedging your position in the stock. Assume that you will hold one share. o What is the hedge ratio? o How much would you borrow (at a rate of 6% for the holding period) to purchase the stock? o What is the amount of your net investment in the stock? o Complete the table below to show the value of your stock portfolio at the end of the holding period. How many call options will you combine with the stock to construct the perfect hedge? Will you buy the calls or sell the calls? Show the option values in the table below. Show the net payoff to your portfolio in the table below. What must the price of one call option be? Answer: The answers are shown below. What is the hedge ratio? Complete the table below to show the value of your stock portfolio at the end of the holding period. How many call options will you combine with the stock to construct the perfect hedge? Will you buy the calls or sell the calls? Since the hedge ratio is 1/3 buy one stock and sell three call options. Show the option values in the table below. Show the net payof f to your portfolio in the table below. Feedback: This question tests the student's ability to construct a perfect hedge on a stock portfolio using call options. Difficulty: Difficult Chapter 20 Futures, Forwards, and Swap Markets 22. [EOC Q29] Consider the following information: where the interest rates are annual yields on U.S. or U.K. bills. Given this information, a. Where would you lend? b. Where would you borrow? c. How could you arbitrage? a. Lend in the United Kingdom. b. Borrow in the United States. c. Borrowing in the United States offers a 4 percent rate of return. Borrowing in the United Kingdom and covering interest rate risk with futures or forwards offers a rate of return of It appears advantageous to borrow in the U.S., where rates are lower, and to lend in the U.K. An arbitrage strategy involves simultaneous lending and borrowing with the covering of interest rate risk: Action Now CF in $ Action at Period-End CF in $ Borrow $1.60 in U.S. .60 Repay loan –1.60 × 1.04 Convert borrowed dollars to pounds; lend £1 pound in U.K. –$1.60 Collect repayment; exchange proceeds for dollars 1.07 × E1 Sell forward £1.07 at F0 = 1.58 0 Unwind forward 1.07 × (1.58 – 1) Total 0 Total $0.0266 23. Suppose that the risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs. A) $1.60/BP B) $1.70/BP C) $1.66/Bp D) $1.63/BP E) $1.57/BP 24. Consider the following: If the futures market price is 1.63 SF/$, how could you arbitrage? A) Borrow Swiss Francs in Switzerland, convert them to dollars, lend the proceeds in Canada and enter futures positions to purchase Swiss Franks at the current futures price. B) Borrow Canadian dollars in Canada, convert them to Swiss Francs, lend the proceeds in Switzerland and enter futures positions to sell Swiss Franks at the current futures price. C) Borrow Canadian dollars in Canada and invest them in Canada and enter futures positions to purchase Swiss Francs at the current futures price. D) Borrow Swiss Francs in Switzerland and invest them there, then convert back to Canadian dollars at the spot price. E) There is no arbitrage opportunity. Chapter 21 Active Management and Performance Measurement 25. [EOC Q7] A manager buys three shares of stock today, and then sells one of those shares each year for the next three years. His actions and the price history of the stock are summarized below. The stock pays no dividends. a. Calculate the time-weighted geometric average return on this porVolio. b. Calculate the time-weighted arithmetic average return on this porVolio. c. Calculate the dollar-weighted average return on this porVolio. Time Cash Flow ($) Holding-Period Return 0 3(–90) = –270 1 100 (100–90)/90 = 11.11% a. Time-weighted geometric average rate of return = (1.1111  1.0  1.0)1/3 – 1 = .0357 = 3.57%. b. Time-weighted arithmetic average rate of return = (11.11 + 0 + 0)/3 = 3.70%. The arithmetic average is always greater than or equal to the geometric average; the greater the dispersion, the greater the difference. c. Dollar-weighted average rate of return = IRR = 5.46%. (You can find this using a financial calculator by setting n = 3, PV = (–)270, FV = 0, PMT = 100, and solving for the interest rate.) The IRR exceeds the other averages because the investment fund was the largest when the highest return occurred. EOC Q22 26. Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core large-cap equity fund. The market proxy and benchmark for performance measurement purposes is the S&P 500. Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund. Her portfolio holds only stocks found in the S&P 500 and cash. Blakely was able to produce exceptional returns last year (as outlined in the table below) through her market timing and security selection skills. At the outset of the year, she became extremely concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market. Taking a bold step, she changed her market allocation. For the entire year her asset class exposures averaged 50 percent in stocks and 50 percent in cash. The S&P's allocation between stocks and cash during period was a constant 97 percent and 3 percent, respectively. The risk-free rate of return was 2 percent. a. What are the Sharpe ratios for the Miranda Fund and the S&P 500? b. What are the M2 measures for Miranda and the S&P 500? c. What is the Treynor measure for the Miranda Fund and the S&P 500? d. What is the Jensen measure for the Miranda Fund? rP - rf ⟶ S =.102 - .02 =.2216 S =- .225 - .02 =.5568 ơ P .37 .44 M 2 measure, blend the Miranda Fund with a position in T-bills such that the “adjusted” portfolio has the same volatility as the market index. Using the data, the position in the Miranda Fund should be .44/.37 = 1.1892 and the position in T- bills should be 1 – 1.1892 = –.1892 (assuming borrowing at the risk-free rate). The adjusted return is: Calculate the difference in the adjusted Miranda Fund return and the benchmark: M (Note: The adjusted Miranda Fund is now 59.46 percent equity and 40.54 percent cash.) Chapter 22 Portfolio Management Techniques EOC Q19 27. On June 1, 2009, Byron Henry was examining a new fixed-income account that his firm, Hawaiian Advisors, had accepted. Included in the new portfolio was a $10 million par value position in Procter & Gamble (PG) percent bonds due April 1, 2036. Henry was concerned about this position for three reasons: (1) there was an unrealized loss on the PG bonds due to a widening in the yield spread between U.S. Treasuries and high-grade corporate bonds; (2) he felt that the PG bonds represented too large a portion of the $100 million portfolio; and (3) he feared that interest rates would move higher over the short term. Hawaiian Advisors has the capability to do short sales and to use financial futures as well as options on futures. With this in mind, Henry collected some information on the PG bonds and on some alternative vehicles, shown in Tables 22.7 and 22.8. TABLE 22.7 Bonds TABLE 22.8 Futures (contract size = $100,000) Henry recalled that the formula for calculating a hedge ratio is where: PVBP(y) = price change for a one-basis-point change (PVBP) in the target vehicle (the PG bond) PVBP(x) = price change for a one-basis-point change (PVBP) in the hedge vehicle (the U.S. Treasury bond or the U.S. Treasury bond future) Henry did a regression using Y (the dependent variable) as the yield of the PG bonds, and X (the independent variable) as the yield of the U.S. Treasury bonds. The result was the following equation: Henry did a second regression using Y (the dependent variable) as the yield of the PG bonds, and X (the independent variable) as the yield on the futures contract. The result was the following equation: For tax reasons, Henry does not want to sell the PG bonds now but would like to protect the portfolio from any further price decline. o Formulate two hedging strategies, using only the investment vehicles cited in Tables 22.7 and 22.8, that would protect against any further decline in the price of the PG bonds. o Calculate the relevant hedge ratio for each strategy. Comment on the appropriateness of each of these strategies for this portfolio. 19. Method 1: Sell short T-bonds to offset the risk of the P&G bonds. To determine how many T-bonds to sell, use the hedge ratio, which gives the ratio of the number of T-bonds to sell for each P&G bond held in the portfolio. The yield beta tells us how much the P&G bond yield changes in relation to the yield on the T-bond. The regression equation indicates that the yield beta is 0.89, indicating that P&G yields are somewhat more stable than Treasury yields. The hedge ratio is therefore .89 × = .8413 Since Byron holds 10,000 P&G bonds ($10 million face value), he needs to sell short . 8413 × 10,000 Treasury bonds, each with face value $1,000. Method 2: Sell T-bond futures contracts. Here, the yield beta is .47, so the hedge ratio is .47 × = .4318 Byron needs to sell short .4318 of the benchmark T-bonds on which the contract is written for each P&G bond he holds. This means he needs to sell 4,318 bonds. Since each futures contract calls for delivery of 100 bonds (i.e., $100,000 face value), he would need to short 43.18 contracts. Chapter 23 Managed Funds 28. Assume that you manage a $3 million portfolio that pays no dividends, has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1220. If you expect the market to fall within the next 30 days you can hedge your portfolio by S&P 500 futures contracts (the futures contract has a multiplier of $250). A) selling 1 B) selling 14 C) buying 1 D) buying 14 E) selling 6