Theory = 1 pt.

Problem Solving = 2 pts.

Theory:
1. It is the actual interest rate earned on an investment in a financial security ​(Realized
Rate of Return)
2. If the current market price is greater than its fair value, the security is _______?
(overvalued)
3. If the security is undervalued, demand increases but the price decreases. ​(FALSE. The
price will also increase)
4. Expected Rate of Return is the interest rate an investor should receive given its risk.
(FALSE. Required Rate of Return)
5. What is the formula to calculate dividends with constant growth rate?

6. There is a ______ relationship between interest rate changes and PV changes.

(Negative/Inverse)
7. The weighted average time to maturity on a financial security using the relative present
values of the cash flows as weights is called? ​(Duration)

Problem Solving:
1. A bond purchased two years ago for $890 is now selling for $925. The bond paid $100
per year in coupon interest on the last day of each year and the last payment was made
today. You intend to hold the bond for four more years and project that you will be able
to sell it at the end of year 4 at $960. It was also projected that the bond will continue to
pay $100 interest every year. What is the fair present value? ​($935.31)

2. Assuming the above situation, what is the expected rate of return? ​(11.607%)

3. Sili Company paid a dividend of $3.50 at the end of last year. It has a constant growth
rate of 2% per year over the last 20 years. The required rate of return on the stock (r​s​) is
10%. What is the fair present value of the stock? ​($44.625)
4. A stock is expected to experience supernormal growth in dividends of 10% over the next
five years. Following this period, dividends are expected to grow at a constant rate of
4%. The stock paid a dividend of $4 last year and the required rate of return on the stock
is 15%. What is the fair present value of the stock? ​($47.820)

5. A bond offers a coupon rate of 10% paid semiannually. The face value of the bond is
$1,000 and it matures in four years. It has a current rate of return of 8% and its current
price is $1,067.34. Calculate the duration of the bond. ​(3.42 years)
6. A zero-coupon bond has a face value of $1,000 with a maturity of four years and a
current rate of return of 8% compounded semiannually. What is the duration of the
zero-coupon bond? ​(4 years)