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BUS245 Introduction to Finance (2021/22)

Practice Exam Question

QUESTION 1

A. Javier bought a bond with a par value of $10,000 and a coupon rate of 8% at par. After a year, he was able to sell his bond for $11,000. Calculate the rate of return on Javier’s investment. What is the current yield and capital gain on this investment?     (10 marks)

B.  What does it mean when a bond is referred to as a convertible bond? Would a convertible bond be more or less attractive to a bond holder than a non-convertible bond? Explain in detail.      (10 marks)

C. (1)  If the demand for a country’s exports falls at the same time that tariffs on imports are raised, will the country’s currency tend to appreciate or depreciate in the long run? Explain your answer.    (5 marks)

(2) If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 60 miles to the gallon, explain what will happen to the U.S. exchange rate. (5 marks)

(3) Suppose that the U.S. Federal Reserve decides to raise interest rates to combat inflation. Discuss how this decision will affect the exchange rate between the U.S. dollar and the euro. (5 marks)

D.  Use the following table of exchange rates (from February 1, 2014 to February 28,  2014) to answer the questions below.

(1) On which date would it have been the best to exchange 300 USD into EUR?

How many EUR could you buy at the exchange rate on this date? (5 marks)

(2) On which date would it have been the worst to exchange 300 USD into EUR?

How many EUR could you buy at the exchange rate on this date? (5 marks)

(3) What is the difference, in EUR, between the best and worst exchange dates? (5 marks) 

       (Total: 50 marks)