Chapter 4 : Money Market

4. What is the annualized discount and investment rate % on a Treasury bill that you purchase
for $9,900 that will mature in 91 days for $10,000?

𝐼𝑅 = 10,000 − 9,900 /9,900 ∗ 365 /91 = 0.0405 ∗ 100 = 4.05%

𝐷𝑅 = (10,000 − 9,900 /10,000 ∗ 360 /91) ∗ 100 = 4.01%

5. The price of 182-day commercial paper is $7,840. If the annualized investment rate is
4.093%, what will the paper pay at maturity?

0.04093 = 𝐹𝑉 − 7,840 /7,840 ∗ 365 /182 = 0.0405

0.04093 ∗ 7840
𝑇𝐻𝑈𝑆 𝐹𝑉 = + 7840 = 8000
2.005

7. The price of $8,000 face value commercial paper is $7,930. If the annualized discount rate
is 4%, when will the paper mature? If the annualized investment rate % is 4%, when will the
paper mature?

Face value (FV) = $8,000

Price (P) = $7,930
Annualized discount rate (DR) = 4%
𝐹−𝑃 360
𝐷𝑅 = ×
𝐹 𝑡

𝑡 = 8000 − 7930 / 8000 × 360/ 0.04

𝑡 = 78.75

So, the commercial paper will mature in approximately 79 days when using the discount rate.
Using the Annualized Investment Rate

The annualized investment rate (IR) is given by:

𝐹 − 𝑃 365
𝐼𝑅 = ×
𝑃 𝑡
𝑡 = 8000 − 7930 / 7930 × 365/0.04

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 𝑡 = 80.55 𝑂𝑅 81 𝐷𝐴𝑌𝑆

8. How much would you pay for a Treasury bill that matures in one year and pays $10,000 if
you require a 3% discount rate?
Given:

Face value (𝐹F) = $10,000

Maturity period = 1 year (365 days)

Required discount rate (DR) = 3%

For a Treasury bill that matures in one year (365 days), we have: 𝑃=10000(1−0.03×365360)
P=10000(1−0.03×365/360)
P=9695.80
11. In a Treasury auction of $2.1 billion par value 91-day T-bills, the following bids were
submitted: If only these competitive bids are received, who will receive T-bills, in what
quantity, and at what price?

Bidder Bid Amount Price

1 $500 million $0.9940
2 $750 million $0.9901
3 $1.5 billion $0.9925
4 $1 billion $0.9936
5 $600 million $0.9939

THEY WILL RECEIVE AS FOLLOWS

1 $500 million $0.9940

2 $600 million $0.9939
3 $1 billion $0.9936
TOTAL 2.1 BILLION

We accept the available bids from the highest price until the whole available amount is sold.
The price will be $0.9936 which is the lowest price received by the accepted bids.
12. If the Treasury also received $750 million in noncompetitive bids, who will receive T-bills,
in what quantity, and at what price? (Refer to the table under problem 11.)
The order of the received bids will change such that the noncompetitive bid is covered first
before all competitive ones.

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 1 $750 million --
2 $500 million $0.9940
3 $600 million $0.9939
4 $0.25 billion $0.9936
TOTAL 2.1 BILLION

The price will also be $0.9936

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Chapter 5 : Bond Market

1. A bond makes an annual $80 interest payment (8% coupon). The bond has five years
before it matures, at which time it will pay $1,000. Assuming a discount rate of 10%,
what should be the price of the bond?
P = PV of coupon payments + PV of face value = $1,254.72

2. 3. Consider the two bonds described below:

Bond A Bond B

Maturity 15 20

Coupon (Seminannual) 10 6

Par Value 1000 1000

a. If both bonds had a required return of 8%, what would the bonds prices be?

PA= 1173
PB = 827.07
b. Describe what it means if a bond sells at a discount, a premium, and at its face amount
(par value). Are these two bonds selling at a discount, premium, or par?
When Pbond < Par , it is selling at a discount
When Pbond > Par , it is selling at a premium
When Pbond = Par, it is selling at Par
Bond A is thus selling at a premium and bond B is selling at a discount.
c. If the required return on the two bonds rose to 10%, what would the bonds’ prices be?
The semi-annual discount rate will become 5% instead of 4% and the prices will
become:
PA= $1,000
PB= $ 656.81
We notice that when the interest rate rose, the prices of both bonds dropped.

4. A two-year $1,000 par zero-coupon bond is currently priced at $819.00. A two-year $1,000
annuity is currently priced at $1,712.52. If you want to invest $50,000 in one of the two
securities, which is a better buy?
First one

1000 = 819(1 + 𝑖)2 𝑡ℎ𝑒𝑛 𝑖 = 10.49%

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Second one
1
(1 – )
(1 + 𝑖)2
1712.52 = 1000 𝑖𝑡 𝑤𝑖𝑙𝑙 𝑏𝑒 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒𝑙𝑦 4.5%
𝑖

Invesrting in the zero coupon bond is better

5.

160 170 180 230

𝑃𝑉 = + + +
(1 + 0.12) (1 + 0.12) 2 (1 + 0.12)3 (1 + 0.12)4
=552.67
180 230
After 2.5 years (1+0.12)0.5
+ (1+0.12)1.5
= 170.08 + 194.04

While the FV from reinvesting the previous payments is

160 × (1.12)1.5 = 160 × 1.1853 = 189.65

170 × (1.12)0.5 = 170 × 1.0583 = 179.91

Wealth= 189.65+179.91+170.08+194.04=733.68
b)

t PMT PV WEIGHT WEIGHT x t

1 160 142.86 0.2584906 0.2584906

2 170 135.52 0.24520962 0.49041924

3 180 128.12 0.23182007 0.69546022

4 230 146.17 0.26447971 1.05791883

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 552.67 1 2.50228889

Duration = 2.50 years

C) using duration formula will give wrong results since duration is calculates at t=0 not at t=2.5.
We need to find the new values at the new interest rate at t=2.5
180 230
After 2.5 years (1+0.11)0.5
+ (1+0.11)1.5
= 170.84 + 196.65

While the FV from reinvesting the previous payments is

160 × (1.11)1.5 = 160 × 1.1696 = 187.14

170 × (1.11)0.5 = 170 × 1.0536 = 179.11

187.14+179.11+170.84+196.65=733.74
733.74−733.68=+0.06

6. The yield on a corporate bond is 10%, and it is currently selling at par. The marginal tax rate
is 20%. A par value municipal bond with a coupon rate of 8.50% is available. Which security
is a better buy?
Corporate Bond
After-tax yield=10%×(1−0.20)
After-tax yield=8%
Yield on municipal bond = 8.50% (tax-exempt)
Since the yield on the municipal bond (8.50%) is higher than the after-tax yield on the corporate
bond (8%), the municipal bond is the better buy.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 = 𝑐𝑜𝑢𝑝𝑜𝑛 / 𝑃𝑟𝑖𝑐𝑒

𝐶 = 0.06713 × 𝑃
𝐶 + 𝑃𝑎𝑟 0.06713 × 𝑃 + 1000
𝐵𝑢𝑡 𝑃 = =
1+𝑖 1.1
P= 968.16

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C= 65

12. A one-year discount bond with a face value of $1,000 was purchased for $900. What is the
yield to maturity? What is the yield on a discount basis?
YTM = (Face value - Purchase price) / Purchase price
= ($1,000 - $900) / $900 = $100 / $900 = 0.1111
= 0.1111 * 100% = 11.11%

15. A 10-year $1,000 par value bond has a 9% semiannual coupon and a nominal yield to
maturity of 8.8%. What is the price of the bond?

1 1000
𝑃 = 45 (1 – (1+0.044)20) / 0.044 + (1+0.044)20

Total portfolio value = 13M+13M+18M + 20M=∗∗20M=∗∗51 million**.

• Weight of Bond A = 13M/13M/51M = 25.49%.
• Weight of Bond B = 18M/18M/51M = 35.29%.
• Weight of Bond C = 20M/20M/51M = 39.22%.

Portfolio Duration=(0.2549×2)+(0.3529×4)+(0.3922×3)=3.02 years.

𝛥𝑟
𝛥𝑃% ≈ − 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 × = −1.40%
1+𝑟
ΔP=$51M×(−0.014)=$−0.714 million.

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Chapter 6: Stock Market

1. If the investment bankers retained $1.26 per share as fees, what were the net proceeds to
eBay? What was the market capitalization of the new shares of eBay?

Solution:
Net Proceeds to Ebay
= (18.00− 1.26)×3,500,000
= $58,590,000.00
Market Cap=44.88 × 3,500,000 = 157,080,000

2. Two common statistics in IPOs are underpricing and money left on the table. Underpricing
is defined as percentage change between the offering price and the first day closing price.
Money left on the table is the difference between the first day closing price and the offering
price, multiplied by the number of shares offered. Calculate the underpricing and money left
on the table for eBay. What does this suggest about the efficiency of the IPO process?
Underpricing = 44.88-18 / 18 = 149.33
MLOT = 44.88 – 18 * 3500000 = 94 080 000

3. Expected Return = 23+0.65-19 / 19 = 24.47%

4. Expected rerutn = 33.3+0.32-27.29 / 27.29 = 23.2%

5. 22 = 0.8 (1+g) / 0.11 -g thus g=7.1%

11. Nat-T-Cat Industries just went public. As a growing firm, it is not expected to pay a
dividend for the first five years. After that, investors expect Nat-T-Cat to pay an annual
dividend of $1.00 per share (i.e., D6 = 1.00), with no growth. If the required

P5 = 1 (1)/0.1 = 10
P0= P5/(1.1)^5 = 6.21
15. An index had an average (geometric) mean return over 20 years of 3.8861%. If the
beginning index value was 100, what was the final index value after 20 years?

Solution: The actual return over the 20 years is (1.038861) 20 = 2.143625 So, the final index
value is 214.3625

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16. Compute the price of a share of stock that pays a $1 per year dividend and that you expect
to be able to sell in one year for $20, assuming you require a 15% return.

17. The projected earnings per share for Risky Ventures, Inc., is $3.50. The average PE ratio
for the industry composed of Risky Ventures’ closest competitors is 21. After careful analysis,
you decide that Risky Ventures is a little more risky than average, so you decide a PE ratio of
23 better reflects the market’s perception of the firm. Estimate the current price of Security the
firm’s stock.
Solution:
23 × $3.5 = $80.50.

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