31. You have decided to invest in two bonds. Bond X is an n-year bond with semi-annual
coupons, while bond Y is an accumulation bond redeemable in 2
n years. The desired
yield rate is the same for both bonds. You also have the following information:
Bond X
Par value is 1000 .
The ratio of the semi-annual bond rate to the desired semi-annual yield rate, r
i
,
is 1.03125 .
The present value of the redemption value is 381.50 .
Bond Y
Redemption value is the same as the redemption value of bond X .
Price to yield is 647.80 .
What is the price of bond X?
(A) 1019
(B) 1029
(C) 1050
(D) 1055
(E) 1072
Course 2, November 2001 33
32. A monopoly faces the following demand and marginal cost functions:
Demand: P = 10 . Q
Marginal Cost: MC = 3Q
where P is price, Q is quantity, and MC is marginal cost.
Now suppose the monopolist is .broken up. by a federal judge such that the marginal
cost function becomes the competitive supply function.
What will be the difference between the equilibrium price in the competitive market and
the monopoly price?
(A) 0.0
(B) 0.5
(C) 1.0
(D) 1.5
(E) 2.0
Course 2, November 2001 34
33. A company.s common stock is currently selling for 25 per share. All of the financial
analysts following the firm are surprised when the company unexpectedly announces that
it expects its future economic income to be lower after the next quarter. Assume that the
stock market is semi-strongly efficient.
How should this news affect the stock price?
(A) The price should not change at all.
(B) The price should not change until the next quarter.
(C) The price should fall immediately to adjust for the
expected slowing earnings growth.
(D) The price should fall gradually over the next quarter.
(E) The price should go up following the announcement.
Course 2, November 2001 35
34. You are given the following data from the national income and product accounts
of a country:
Account
Personal Consumption Expenditure 4.5
Gross private domestic investment 2.1
Producer.s durable equipment
and nonresidential structures 1.0
Residential structures 0.7
Changes in business inventories 0.4
Exports 1.1
Imports 0.9
Government purchases of goods and services 3.1
What is the Gross Domestic Product of this country?
(A) 9.5
(B) 9.7
(C) 9.9
(D) 11.6
(E) 12.0
Course 2, November 2001 36
35. At time t = 0, Sebastian invests 2000 in a fund earning 8% convertible quarterly,
but payable annually.
He reinvests each interest payment in individual separate funds each earning 9%
convertible quarterly, but payable annually.
The interest payments from the separate funds are accumulated in a side fund that
guarantees an annual effective rate of 7%.
Determine the total value of all funds at t = 10 .
(A) 3649
(B) 3964
(C) 4339
(D) 4395
(E) 4485
Course 2, November 2001 37
36. Jack has an equally weighted portfolio of stocks X and Y . The beta of his portfolio
is 0.9 . Jill has an equally weighted portfolio of stocks X, Y, and Z . The beta of stock Z
is 1.2, the Treasury bill rate of return is 6%, and the expected return on the market
portfolio is 14.4% .
What is the expected risk premium on Jill.s portfolio?
(A) 6.0%
(B) 7.6%
(C) 8.4%
(D) 8.8%
(E) 10.1%
Course 2, November 2001 38
37. A company.s dividend per share is expected to grow indefinitely at a rate of 5% per year.
Suppose the current stock price is 500 and the next annual dividend, payable one year
from now, is 10 . Assume the opportunity cost of capital is constant.
Three investors, Alex, Bill, and Carl, each invest in the company. Alex invests for one
year, Bill invests for two years, and Carl invests for three years.
Who expects the highest annualized rate of return?
(A) Alex
(B) Bill
(C) Carl
(D) Alex, Bill, and Carl all have the same expected rate of return.
(E) Not enough information is given here to answer the question.
Course 2, November 2001 39
38. A competitive industry is composed of identical firms.
Which of the following statements about long-run equilibrium in the industry are true?
I. Firms. accounting profits are equal to their opportunity costs.
II. Firms produce the quantity at which average costs are minimized.
III. Firms produce the quantity at which marginal costs are minimized.
(A) II only
(B) I and II only
(C) I and III only
(D) II and III only
(E) I, II, and III
Course 2, November 2001 40
39. Suppose there is a simultaneous increase in the money supply and an increase in
government purchases.
Based on the IS-LM model, what will be the effect on real output and interest rates
in the short run?
(A) Real output will decrease, and interest rates will increase.
(B) Real output will increase, and interest rates will increase.
(C) Real output will increase, and interest rates will decrease.
(D) Real output will increase, but the effect on interest rates cannot be determined.
(E) The effect on real output cannot be determined, but interest rates will increase.
Course 2, November 2001 41
40. A company stock is currently trading at 50 . Over the next year, this stock will either
increase in value by 10% or decrease by x%. The risk-free rate is 4%. The value of a
one-year European put option for this stock at an exercise price of 50 is 1.28 .
Calculate x.
(A) 0
(B) 2
(C) 4
(D) 6
(E) 8
Course 2, November 2001 42

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