Midterm Bus312

Midterm Exam, BUS312, DAY, FALL 2013

NAME:  ________________________________________Student #________________

Instructions: Open book and open notes. Work independently. For qualitative questions, point form is not an acceptable answer. For quantitative questions, an indication of how you arrived at particular numbers is required for the purpose of assigning part marks.  There are a total of 60 marks on this examination. This examination is composed of 6 questions and 6 pages.  Answer all questions on the examination.  No other papers will be marked. The examination period is two hours exactly. If you would like your exam eligible for remarking, use pen rather than pencil. No washroom breaks during the exam period. Remove baseball caps or wear them backwards.

1. (10 Marks) Today, you purchase a financial asset that promises quarterly payments of $300 each with the first payment exactly two years and ten months from today and the last payment eight years and four months from today. There are no other cash flows or payments on this financial asset. When you purchase the financial asset it offers a rate of return of 4.5% per annum compounded quarterly. Four years and two months from today, you sell the financial asset. At the sale, the financial asset offers a rate of return of 4.6% per annum compounded continuously. Between your purchase and your sale of the financial asset you reinvest payments that you receive in interest bearing financial assets that offer a rate of return of 4.4% per annum compounded monthly.

Required: What is the annualized holding period rate of return compounded continuously on your investment between your purchase and your sale including reinvested payments with interest?

[pic 1]

[pic 2]

The time period between the 1’st and last payment is

8yrs+4mons-2yrs-10mons

= 7yrs+16mons-2yrs-10mons

= 5yrs+6mons

=5×4+2=22 quarters

Thus, there are 22+1=23 payments on the financial asset.

The 1’st payment is in 2yrs+10mons=2×4+3 1/3 = 11 1/3 quarters.

The HP is 4yrs+2 mons = 4×4+2/3 = 16 2/3 quarters.

So, in the above diagram, you sell the FA at 2/3 (today) + 16 2/3 = 17 1/3.

1. PP:

K=11 1/3

Effective rate per quarter = 0.045/4 = 0.01125.

PP=[pic 3]     

n is the number of payments from 1st payment to the last payment

1. SP

When you sell the financial asset, there are 17 remaining payments.  Since you sell 1 month after a payment, whoever buys the financial asset from you waits 2/3 of a quarter before he/she gets the first payment, so, k=2/3

Effective rate/quarter when you sell = [pic 4]   

SP=[pic 5]     

n is the remaining payments