Suppose that the 1.5-year and 2-year zero rates with continuous compounding are 4.70% and 4.76%, respectively. (a) What is the forward rate for the six-month period beginning in 18 months (1.5R2) (from Year 1.5 to Year 2) with continuous compounding?

(b) What is the forward rate for the six-month period beginning in 18 months (1.5R2) (from Year 1.5 to Year 2) with semiannual compounding?

(c) What is the (Year 0) value of an FRA that promises to pay you 6% (compounded semiannually) on a principal of $1 million for the six-month period starting in 18 months (from Year 1.5 to Year 2)?

Meteorologists have tracked the total annual rainfall in the town of Spring Valley year after year, and found that it follows a normal distribution. The average annual rainfall is 18 inches, with a standard deviation of 6 inches. In one particular year, only 9 inches of rain fell. You work for the local newspaper, and your editor has asked you to write a story about the terrible drought the town is suffering from and how dire the situation is. Write a brief paragraph that you could use to explain the statistical facts to the newspaper readers. Include a comment on whether you agree that the situation is very abnormal. Make sure you use what you are learning about the normal distribution in your newspaper article.

Suppose that an investor with a 3-year investment horizon is considering buying an 8-year 6% coupon bond selling at par (semi-annual coupon payments). The investor expects that she can reinvest the coupin payments at an annual interest rate of 7% and that at the end of the investment horizon all bonds will be selling to offer a YTM of 9%.

How much is the coupons & interest earned on reinvesting these coupon by the end of 3-yr?

What is the sale price of the bond by the end of 3 year?

What is the (annualized) expected holding period return for this bond?

Round answers to 2 decimal places

Two-year Government of Canada bonds is currently 4.75% and the yield on five-year Government of Canada bonds is currently 5.5%.

You are a borrower. You have decided that it is highly unlikely that the 3-year rate, two years from today, will rise above 5.50%. Based on this knowledge and the fact that you are a borrower, you should:

Multiple Choice

• Borrow long & lock in the five-year rate today – you will minimize your total interest costs

• Borrow short (2-year) & then roll over into a 3-year loan when the 2-year loan matures – you will minimize your total interest costs

• You are indifferent between borrowing short and rolling over or locking in the long rate initially

Five years ago you invested $10,000 in a mutual fund. You have earned the following annual returns over the last five years: {+18%, -4%, +10%, +22%, -16%}. What is the Geometric Mean of the five annual returns?

Multiple Choice

• 3.67%

• 5.01%

• 6.23%

• 4.33%

Burton Malkiel’s bond theorem #3 said that high coupon bonds have less price volatility than low coupon bonds. Which of the following statements correctly explains why this is true?

Multiple Choice

• High coupon bonds are usually issued by governments

• High coupon bonds are held principally by widows and institutions

• High coupon bonds have a greater proportion of their total cash flow occurring closer to today

• High coupon bonds allow their holders to defer the payment of income tax into the future

Exactly one year ago you bought a three-year, $1,000 bond with an 8% coupon and a 6% yield to maturity (YTM). Just after you bought the bond, the YTM fell to 5%. If you hold the bond to maturity, what rate of return will you actually earn?

A) 6% B) 4.82% C) 5.10% D) 5.93%

Suppose that an investor with a 3-year investment horizon is considering buying an 8-year 6% coupon bond selling at par (semi-annual coupon payments). The investor expects that she can reinvest the coupin payments at an annual interest rate of 7% and that at the end of the investment horizon all bonds will be selling to offer a YTM of 9%. How much is the coupons & interest earned on reinvesting these coupon by the end of 3-yr? Round your answer to 2 decimal places.

Suppose that Ramos contributes $6000/year into a traditional IRA earning interest at the rate of 4%/year compounded annually, every year after age 35 until his retirement at age 65. At the same time, his wife Vanessa deposits $4700/year into a Roth IRA earning interest at the same rate as that of Ramos and also for a period of 30 years. Suppose that the investments of both Ramos and Vanessa are in a marginal tax bracket of 25% at the time of their retirement and that they both wish to withdraw all of the money in their IRAs at that time.

(a) After all due taxes are paid, who will have the larger amount?

The Brick Company had cash sales of $227,900 for Year 1, its first year of operation. On April 2, the company purchased 214 units of inventory at $225 per unit. On September 1, an additional 161 units were purchased for $248 per unit. The company had 66 units on hand at the end of the year. The company’s income tax rate is 40 percent. All transactions are cash transactions.
a. The preceding paragraph describes five accounting events: (1) a sales transaction, (2) the first purchase of inventory, (3) a second purchase of inventory, (4) the recognition of cost of goods sold expense, and (5) the payment of income tax expense. Show the amounts of each event in horizontal statements models like the following ones, assuming first a FIFO and then a LIFO cost flow.
b. Compute net income using FIFO.
c. Compute net income using LIFO.
e. Which method, FIFO or LIFO, produced the larger amount of assets on the balance sheet

Colsen Communications is trying to estimate the first-year net operating cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:

The company has a 40% tax rate, and its WACC is 13%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.

b.If this project would cannibalize other projects by $1.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.
The firm's OCF would now be $

1. Tax disclosures and strategies: Examine the income tax expense and deferred tax assets and liabilities.

a)      Determine the amount of tax expense on the income statement and distinguish between current and deferred portions.

b)      Assess the company’s effective tax rate, is it consistent? If not, do the fluctuations seem reasonable?

c)      Do the deferred tax assets and liabilities seem appropriate given the company’s industry?

d)      Is there a valuation allowance? How big is it relative to total deferred tax assets? Has the valuation allowance changed markedly during the year? This might indicate income shifting.