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Date Posted: 07:49:12 04/22/02 Mon
Author: Dr. D.
Subject: Spring 1999Sample exam (#7 and #10)
In reply to: NathanP 's message, "Sample exam questions...." on 19:18:05 04/18/02 Thu

>#7: Can you explain how to set this up properly? It
>seems the calculator should be in BEG mode- but that's
>not right? Also, why would you use N=5 when the
>question specifically says "4 years from now"?

The setup is deceptive. You can view this as a "compound" problem, with one of two setups. In the first, draw a timeline and cross out the first payment. The remaining payments look like the FV of a 4 period ordinary annuity. So, find the FV of the 4 period annuity and then find the FV of the lump sum (also for 4 years) add the two.

In the 2nd setup, cross out the LAST payment. You then have the FV of a 4 period annuity due. To this FV add $3000 (the last payment). It should give you the same answer.

Of course, you could also do it payment by payment....


>#10: For MY better understanding- If this was a
>regular annual coupon rate bond, would "B" be correct?

Actually, for an annual coupon the answer would STILL be "C". Here's why: if the bond sells at a discount (i.e. the coupon rate is < the market rate), and market rates don't change, the discount dissappears over time. So, in this scenario, the future price would be GREATER than the initial price. However, the problem has it being the SAME as current price. Therefore, the market rate must have increased (this would drive the price down to it's current price, rather than the higher price it would have had rates not stayed the same).

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