My Rationale would be that,
Since a bonds price sensitivity to fluctuations in interest rates depend on coupon rates ,embedded options & MATURITY
Answer : B
My Rationale would be that,
Since a bonds price sensitivity to fluctuations in interest rates depend on coupon rates ,embedded options & MATURITY
Answer : B
Q2. Ans B
Default risk is low as firms are AAA. As all payments are concentrated at maturity (no coupons) so price sensitive to maturity.
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q3. The effective annual yield (EAY) of a loan with a quoted rate of 8%, compounded quarterly is equivalent to the EAY of a loan with a continuously compounded quoted rate of:
A) 8.16%.
B) 8.08%.
C) 7.92%.
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Q3. Ans C
This will not require any calculation.
Please remember that a corresponding continuous compound rate will be lesser than that of the discrete rate if they are yielding same.
If you wish to calculate, (1.02)^4 = exp(r) [e raised to the power of r]
Solving for r will give you the result of 7.92%
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q4. An investment advisor comes to you with 2 plans.
First plan will pay nothing in first four years and then it will pay $20,000 per year for 5 years.
Second plan will pay $15,000 per year in first 3 years and then a payment of $20,000 in the fourth year.
All payments are done at the end of year. Which plan should you go for if both require an investment of $50,000 now? Your required rate of return is 10%.
A. First Plan
B. Second Plan
C. None of the plans
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First Plan option A has higher NPV of 1783
First Plan
CF0 = -50000 CO1 - 0 F01-4, CO2-20000 FO2-5 , I/Y=10 , CPT NPV=1783
Second Plan CF0 = -50000 CO1 - 15000 F01-3, CO2-20000 FO2-1 , I/Y=10 , CPT NPV=900+
Q4 Answer: A:
First Plan: Find the PV after 4 years; FV = 0 ; PMT = 20,000 N=5, I/Y = 10%
Find the PV now => PV0 = PV4/(1.1)4=> 51,783 => NPV = 1,783
Second Plan: For recurring payments PMT = 15K, I/Y = 10, N=3, FV = 0; PV = -37,302. Find the present value of the single payment; PV = 13,660.26. So the second plan gives total PV of 50,963.04 => NPV = 963.04
So Plan A is better
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q5.What is the effective annual rate on a personal loan that charges 24% per annum compounded monthly?
A. 24%
B. 26.8%
C. Data Insufficient
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[COLOR=DarkRed]Q5. Ans B:
Periodic rate = 2%
EAR= (1.02)^12
[QUOTE=Daulat Guru;1702][COLOR=DarkRed]Q5. Ans B:
Periodic rate = 2%
EAR= (1.02)^12
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