IM: REVIEW CHAPTER 1 TO CHAPTER 8

1. A $1,000 face-value bond pays a 6% coupon and matures in 3 years. Interest rates are 6% per annum,
with semiannual compounding. Calculated Macaulay's duration
2. A $100 000 bond with 18 months to maturity and 10% p.a. coupon. The three consecutive 6-month yields
are 5% p.a. per annum, 6% p.a. per annum and 8% p.a. per annum respectively. Calculate Fisher–Weil
duration
3. A $100,000 90-day bill with a yield of 8% is purchased now. Assuming the term structure is flat at 8%, and
does not change over the life of security, in 30 days’ time the price of the bill: a/ is unchanged b/
increases; c/ decreases; d/ cannot determined
4. A $45,000 90-day bill is purchased with a yield of 4.5% and sold 30 days later at a yield of 5%. What is the
discrete holding period return for this note? What is the continuous holding period return for this note?
5. A $500,000 180-day note is purchased with a yield of 6% and sold 90 days later at a yield of 5%. a/ What
is the discrete holding period return for this note? b/ What is the continuous holding period return for
this note?
6. A 2-year bond has a duration of 3.780 periods and a value of $103,717.10. Calculate the decrease in bond
price if the yield instantaneously increases from 6% p.a. to 6.1% p.a.
7. A 3.02% 7-day money market investment of $25m will pay interest of ? And final payment?
8. A bank-accepted bill has a yield of 5%. What is the price of the bill if there are 90 days to maturity and
the face value of $500,000?
9. A portfolio includes a risky asset and a risk-free asset. The risk-free rate is 6% and the expected return of
risky asset is 12%. Portfolio weight for the risky asset is 60%. What is expected return of the portfolio?
10. A yield of 3.6% per annum on a two-year 4.5% per annum bond and principal of $100,000, with six-
monthly coupons. What is the price of the bond?
11. An asset has risk-free rate of 3%, risk-market rate of 10%, with beta of 1.5. What is the expected return?
12. An asset has risk-free rate of 5%, market risk premium of 8%, with beta of 0.9. What is the expected
return?
13. An individual is questioned about their utility at different levels of wealth: 10, 20 and 30 and U(wealth):
22, 30 and 34, respectively. Using this information, what does this imply about the risk preference of this
individual
14. An investment A with the following three returns: 5% for year 1, 6% for year 2, 4% for year 3. What is a/
expected return for A; b/ variance of A; c/ standard deviation of A
15. An investment asset initially costs $10,000. At the end of one year, an investor estimates that there are
three possible values of the asset. These values are $8,000, $12,000 and $15,000, with respective
probabilities of 50%, 30% and 20%. a/ What is the expected outcome? b/ What is the expected return? c/
What is the standard deviation? d/ What is the coefficient of variation?
16. An investment B with the following three returns: 6% for year 1, 10% for year 2, 8% for year 3. What is a/
expected return for A; b/ variance of A; c/ standard deviation of A
17. An investor predicts that an investment will earn -5%, 8% and 12%, with respective probabilities of 30%,
45% and 25%. What are expected returns?
18. Assume a fully franked dividend of $70 is received and that tax has been paid at the corporate tax rate of
30%. Assume a personal tax rate of 45%.
19. Bond A with the price of $ 995 with duration of 2.63. Bond B with the price of $1050 with duration of 3.2.
T duration in the portfolio of Bond A and Bond B?
20. Calculate the price of a one-year maturity bond with quarterly coupons of 8% per annum, a yield of
6.00% per annum and face value of $100 where the bond is purchased with 50 days to the first coupon
payment and there are 182 days in the coupon period?
21. Consider an equal-weighted portfolio that comprises two assets: A and B. The monthly returns for each
asset for the first four months of the year are given below. Returns of Asset A are: Month 1: 5%; month
2: -2%; month 3: -3% and month 4: -6%. Returns of Asset B is: month 1: 4%; month 2: 1% and month 4:
2%. The geometric sum of monthly portfolio returns is 13.49%. What is the month 3 for asset B?
22. Consider an investment purchased for $1000 and sold four months later for $1200. This money is
reinvested for another four months, to the end of the year, with the same rate of returns. What are 12-
month returns using a/ simple interest and b/ compound interest
23. Consider the case of an investor with $50 000 of their own funds, who subsequently obtains a margin
loan for an extra $75 000. The portfolio value increases by 30% over the investment period. a/ What is
net portfolio returns? b/ what is the LVR?
24. Consider the case of an investor with $50 000 of their own funds, who subsequently obtains a margin
loan for an extra $75 000. What is worth for a/ the geared portfolio?, b/ the ungeared portfolio? and c/
for LVR (loan-to-value ratio)?
25. Consider the following limit order book for a company trading on the ASX: a/ Suppose an at-market sell
order arrives for 5000 shares. At what price will the trade occur, and what will the new limit order book
look like after the transaction is completed? b/ the state of the limit order book after the transaction? c/
A limit order buy order arrives for 5000 shares at $2.10 ?
Orders to buy Orders to sell
Price Quantity Price Quantity
2 10000 2.1 3000
1.95 5000 2.15 20000
26. Consider the following limit order book for a company trading on the ASX: Suppose an at-market sell
order arrives for 5000 shares. At what price will the trade occur, and what will the new limit order book
look like after the transaction is completed?
Orders to buy Orders to sell
Price Quantity Price Quantity
2 10000 2.1 3000
1.95 5000 2.15 20000
27. Consider the following quotation in US: USD/AUD 0.9025 - 0.9075, what is the mid-rate quotation in US?
And in AUS?
28. Determine the price of a four-year bond with six-monthly coupons of 5.50% per annum, a yield of 4.5%
per annum and four years to maturity. The maturity value is $5,000,000.
29. Determine the price of a two-year bond with six-monthly coupons of 10.00% per annum, a yield of 6.4%
per annum and face value of $100 where the bond is purchased with 40 days to the first coupon payment
and there are 181 days in the coupon period.
30. Determine the price of a two-year bond with six-monthly coupons of 10.00% per annum, a yield of 6.4%
per annum and face value of $100 where the bond is purchased with 40 days to the first coupon payment
and there are 181 days in the coupon period.
31. Given the following indirect rates for the Australian dollar: CNY/AUD: 5.9213; USD/AUD: 0.7337;
NZD/AUD: 1.0706. Calculate the CNY/USD cross rate.
32. If you buy a share for $8, the company pays a dividend of $0.20, and at the end of the period the share
price is $10, what is the return?
33. Investment A provides a 40% chance of paying $1000 (good year) and a 60% chance of paying $200 (bad
year). Alternatively, investment B has a 50% chance of paying $800 (good year) and a 50% chance of
paying $500 (bad year). The pay-off varies across investments and according to the state of the world.
Which investment will be preferred if the investor has logarithmic preference functions?
34. Investment A provides a 40% chance of paying $1000 (good year) and a 60% chance of paying $200 (bad
year). Alternatively, investment B has a 50% chance of paying $800 (good year) and a 50% chance of
paying $500 (bad year). The pay-off varies across investments and according to the state of the world.
Which investment will be preferred if the investor has logarithmic preference functions?
35. Investment X provides a 40% chance of paying $10 (good year) and a 60% chance of paying $2 (bad year).
Alternatively, investment Y has a 50% chance of paying $8 (good year) and a 50% chance of paying $5
(bad year). The pay-off varies across investments and according to the state of the world. Which
investment will be preferred if the investor has a quadratic preference function with a level of risk
aversion (=c) equal to 0.08?
36. Investment X provides a 40% chance of paying $10 (good year) and a 60% chance of paying $2 (bad year).
Alternatively, investment Y has a 50% chance of paying $8 (good year) and a 50% chance of paying $5
(bad year). The pay-off varies across investments and according to the state of the world. Which
investment will be preferred if the investor has a quadratic preference function with a level of risk
aversion (c) equal to 0.08?
37. Price of bill with yield 1 of 3.5% and yield 2 of 4% in 90-days time. What percentage changes in yield?
38. Suppose Beta of stock A is 1.2 and Beta of stock B is 0.9, with equal portfolio weight for stock A and stock
B. What is the beta for portfolio consisting of stocks A and B?
39. Suppose covariance between stock A and the market is 0.3, and standard deviation square is 0.25.
Calculate Beta of stock A?
40. Suppose standard deviation of the security is 0.8. Standard deviation of market is 0.6. Correlation
coefficient between the security and market is 0.6. Calculate Beta of the security.
41. Suppose the 2-month of 5.89% p.a. and 3-month yields of 6.47% p.a., use the piecewise approach to
estimate the yield curve for a maturity of 2.5 months - y(2.5)
42. Suppose the annual returns 10% p.a. and there is continuous compounding. Calculate the effective rate.
43. Suppose the expected return of stock A is 11%. Beta is 1.2 and risk market rate is 10%. Calculate the risk-
free rate.
44. Suppose the expected return of stock A is 12% and the expected return of stock B is 9%, with equal
portfolio weight for stock A and stock B. Calculate the mean return of the portfolios consisting of stocks
A and B
45. Suppose the expected return of stock A is 15.5%. The risk-free rate is 5% and risk market rate is 12%.
Calculate Beta of stock A?
46. Suppose the expected return on the market is 12%, the risk-free rate is 4% and standard deviation for the
market is 2%. Find the expected return for a portfolio that has a standard deviation of 1%.
47. Suppose the market return is 18%, the risk-free rate is 5% and standard deviation for the market is 10%.
Standard deviation for portfolio A is 5%. What is the expected return of portfolio A?
48. Suppose the risk-free rate is 5% and risk market rate is 12%, correlation coefficient between the portfolio
A and the market portfolio is 0.3. Standard deviation of portfolio A is 1.2. Standard deviation of market
portfolio is 0.9. Calculate the expected return of portfolio A.
49. Suppose we are given, a USD/AUD quotation of 1.235 and a EUR/AUD quotation of 0.6241. Calculate the
EUR exchange rate expressed in USD?
50. Suppose you purchase a share for $4.00 and at the end of four months the share is worth $5.00. a/ What
are a discrete period return over 4 months? b/ What are a continuously compounded return over the
four months
51. Suppose you purchased a share in the USA for $12.50 and later sold the investment for $14.10. If the USD
depreciated over the period from 1 AUD = 0.73 USD to 1 AUD = 0.75 USD, calculate the Australian dollar
return on the investment.
52. Suppose you purchased a share in the USA for $12.50 and later sold the investment for $14.10. If the USD
 depreciated over the period from 1 AUD = 0.73 USD to 1 AUD = 0.75 USD, calculate the Australian dollar
return on the investment. At what exchange rate would the Australian dollar return be reduced to zero?
53. The beta of a portfolio is: a/ the security-specific risk, unrelated to the risk of the market. b/ the risk of
the portfolio relative to the market. c/ the risk premium associated with a portfolio. d/ another word for
the capital market line slope.

54. The bond is purchased now for $99 173.46 and sold in 90-days time for $100 000. What is the holding
period return? And continuously compounded rate of return?
55. The current price of a just-issued 13-week Treasury note is $98,000 with a face value of $100,000. What
is the yield on the note?
56. The quoted yield for a 90-day dealer's bill is 3.38% per annum. For a $100,000 face value, what is the
price?
57. The returns on an asset over three consecutive holding periods are 4%, -6% and 5%. a/ what is arithmetic
return? b/ arithmetic mean return, c/ geometric return; d/ geometric mean return.
58. The risk-free rate of return is 5%, standard deviation of the risky asset portfolio is 10% and the expected
return on the risky asset is 15%. Standard deviation of the portfolio is 9%. What is expected return of the
portfolio?
59. The yield of a $100,000 30-day bill increases from 7% to 8%. What is the effect on the price of the bill? a/
there is no change; b/ the bill price increases; c/ the bill price decreases; d/ there is insufficient
information to determine the exact effect.
60. The yield of a $50,000 45-day bill decreases from 7% to 5%. What is the effect on the price of the bill? a/
there is no change; b/ the bill price increases; c/ the bill price decreases; d/ there is insufficient
information to determine the exact effect.
61. USD/AUD has the bid rate of 0.994 and ask rate of 0.995. EUR/AUD has the bid rate of 0.5855 and ask
rate of 0.591. what amount would an investor receive from exchanging 1AUD for EUR?
62. Using the concept of elasticity, estimate the change in the price of a $500,000 60-day bank-accepted bill
when the yield increases from 6% to 7%.
63. What is the price of a two-year bond with six-monthly coupons of 10.00% per annum, a yield of 6.40%
per annum and two years to maturity? The investment face value is $100,000.
64. What is the price of a two-year bond with six-monthly coupons of 4% per annum, a yield of 5.00% per
annum and face value of $100 where the bond is purchased with 36 days to the first coupon payment
and there are 183 days in the coupon period?
65. What is the price of a two-year bond with six-monthly coupons of 4.505% per annum, a yield of 5.51%
per annum and face value of $100 where the bond is purchased with 120 days to the first coupon
payment and there are 184 days in the coupon period?
66. Which of the following is correct? a/ The beta of the market portfolio is one. b/ The beta of all portfolios
is one. c/ The beta of the risk-free asset is one. d/ The beta of the risk-free asset is zero.

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