1 CASE QUESTIONS BOOKLET Finance 550 Lee Pinkowitz and Sandeep Dahiya MIDTERM EXAM October 17th, 2015 Please read the following instructions carefully: (i)Put all your solutions and work on the ANSWER SHEETS, NOTon these pages. You can use these pages for scratch work, but nothing written here will be graded.(ii)Read the questions completely and carefully. Make sure you understand what is being asked before launching into calculations. It is possible that you are given more information than needed. (iii)For dollar figures, you can round to the nearest cent. For rates, carry computations out 4 places (i.e. 0.0123 =1.23%) (iv)Check that there are 9 pages and 4 sections in your CASE QUESTIONS booklet (v)You may have at your desk a pen, pencil, a pocket calculator and ONE side of a formula sheet. There is to be NO sharing of calculators or case questions. You may not use laptops or PDAs for the test. You cannot use your calculator manual. (vi)Allocate your time wisely. Use the number of points assigned to each question as your guide. (vii)GOOD LUCK

2 SECTION I: YOU CAN’T HANDLE THE TRUTH!!! OR MAYBE YOU CAN Questions 1-4 (20 points total) True or False, Explain: (20 points total –5 points each question) Use the following information to determine whether the statements are true or false. Check the appropriate box. If the statement is false AND ONLY if it is false provide a BRIEF explanation as to why it is false (BRIEF means AT MOST a few sentences). Show work if necessary. 1.All of the bonds below are compounded semi-annually and all have a face value of $1,000. If the YTM immediately increases by 200 basis points, Bond A MUST have the LARGESTpercentage decrease in price. Bond A.20 year zero coupon bond of a consumer products company which has a bond rating of AA- Bond B.5 year bond trading at a premium to par with a coupon rate of 6% which was upgraded to A+ last year Bond C.2 year bond trading at a discount to par with a coupon rate of 10%, and a bond rating which had been downgraded 3 notches to BBB+ four months ago. 2.All of the bonds below are compounded semi-annually and all have a face value of $1,000. Bond C MUST sell for the highest price. Bond A.26 year zero coupon bond with a YTM of 7% Bond B.8% coupon rate bond with a YTM of 13% Bond C.15% coupon bond with a YTM of 11% Bond D.5 year zero coupon bond 3.If you invest $100 at 12% EAR, you will have roughly $769 in 18 years. 4.Assume you have only two assets available to invest. One is risk-free with an expected return of 3.2%. You can borrow or lend as much as you want at this rate. The other is a risky asset with an expected return of 11% and an expected standard deviation of 9.58%. You ARE able to form a portfolio with an expected standard deviation of 10%.

3 SECTION II: THE FIRST RULE OF FIN CLUB IS YOU DON’T ADD ACROSS TIME!