UNIT 4: Efficiency of Financial Market

Numerical Questions
1. On the basis of following information, you are required to calculate:
a. If investors require a 4 percent annualized return on a one-year T-bill with a $10,000 par value.
What is the price of the T-bill that they are willing to pay?
b. If investors require a 4 percent annualized return on a six-month T-bill. What is the price that they
will be willing to pay for a T-bill with a par value of $10,000?
c. An investor purchases a T-bill with a six-month (182-day) maturity and $10,000 par value for
$9,800. If this T-bill is held until maturity, what is the yield of this T-bill?
d. If a newly issued 6-month (182-day) T-bill with a par value of $10,000 is purchased for $9,800, what
is the discount yield of T-bill?
(Ans: a. $ 9,615.38 b. $9,803.92 c. 4.09% d. 3.95%)
2. A $ 50,000 T-bills that matures in 90 days and is currently selling for $ 48,500. If this T-bills is held
until maturity, what is the discount yield? What is the bond equivalent yield? What is the yield to
maturity based on pricing formula? Assume 360 days in a year.
(Ans: 12%; 12.37%; 13%)
3. The auction price for a T-bills is $ 970 on a $ 1,000 face value and the bill mature in 180 days. Thirty
days after purchases, the investor willing to sell at a discount rate of 5.8%.
a. Discount rate on T-bills
b. Coupon Equivalent Yield
c. Price of T-bills after 30 days
d. Holding period return
(Ans: a. 6% b. 6.2% c. $975.83 d. 0.601%)
4. From the following sets of figures, calculate the discount rate on each T-bill and convert that rate to the
appropriate investment (or coupon equivalent yield):
a. A new three months T-bills sells for $ 98.25 on a $ 100 basis.
b. The investor can buy a new 12 months T-bill for $ 96 on a $ 100 basis.
c. A 30 days bill is available from a government securities dealer at a price of $ 97.50 on a $ 100 basis.
(Ans: a. 7 %; 7.22% b. 4%; 4.22% c. 30%; 31.20%)
5. On the basis of following information, you are required to calculate:
a. If an investor purchases 30-day commercial paper with a par value of $1,000,000 for a price of $
995,000, and holds the commercial paper until maturity, what is the yield of the commercial paper?
b. An investor purchased a negotiable certificate of deposits (NCD) a year ago in the secondary market
for $990,000. He redeems it today upon maturity and receives $1,000,000. He also receives interest
of $40,000. His annualized yield on this NCD?
c. An investor initially purchased securities at a price (PP) of $992,000 while agreeing to sell them
back at a price (SP) of $1,000,000 at the end of a 60-day period. What is the yield (or repo rate) on
this repurchase agreement?
(Ans: a. 4.82% b. 5.05% c. 4.84%)

@BR Dhungana, MBA_FIM

6. Suppose Samsung Company sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10
percent coupon rate, and semiannual interest payments.
a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6
percent. At what price would the bonds sell?
b. Suppose that, 2 years after the initial offering, the going interest rate had risen to 12 percent. At what
price would the bonds sell?
c. Suppose that the conditions in part (a) existed that is, interest rates fell to 6 percent 2 years after the
issue date. Suppose further that the interest rate remained at 6 percent for the next 8 years. What
would happen to the price of the Samsung Company bonds over time?
(Ans: a. $ 1,251 b. $ 898.89)
7. A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000, may be called in 4 years at a
call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)
a. What is the bond’s yield to maturity?
b. What is the bond’s current yield?
c. What is the bond’s capital gain or loss yield?
d. What is the bond’s yield to call?
(Ans: a. 10.67% b. 10.91% c. 0.24 % d. 10.42%)
8. Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (i.e., D1 = $0.50).
The dividend is expected to grow at a constant rate of 7 percent a year. The required rate of return on the
stock, ks, is 15 percent. What is the value per share of the company’s stock?
(Ans: $6.25)
9. Harrison Clothiers’ stock currently sells for $20 a share. The stock just paid a dividend of $1.00 a share
(i.e., D0 = $1.00). The dividend is expected to grow at a constant rate of 10 percent a year. What stock
price is expected 1 year from now? What is the required rate of return on the company’s stock?
(Ans: $ 22; 15.5%)
10. Hart Enterprises recently paid a dividend, D0, of $1.25. The company expects to have supernormal
growth of 20 percent for 2 years before the dividend is expected to grow at a constant rate of 5 percent.
The firm’s cost of equity is 10 percent.
a. What year is the terminal, or horizon, date?
b. What is the firm’s horizon, or terminal, value?
c. What is the firm’s intrinsic value today, Pˆ 0?
(Ans: b. $ 37.80 c. $ 34.09)

@BR Dhungana, MBA_FIM