Problem 1: Treasury bill (35 pts) Assume a $1,000 Treasury bill is quoted to pay 8% and matures in 3 months.

1. How much interest would an investor receive? (10 pts)

2. What will be the price of the Treasury bill? (5pts)

3. What will be the true rate of return? (10 pts)

4. Assume you are considering a $10,000 par value Treasury strip that matures in 20 years. The discount rate is 9%. What is the price (present value) of the investment? (The price of a Treasury strip note of bond can be found using Appendix C toward the back of the text). (10pts)

Problem 2: Current yield and yield to maturity comparison (30 pts) Assume a 7% coupon rate with a par value of $1,000. The bond is currently selling for $771.42 and has 15 years to maturity.

1. What is the current yield? (5 pts)

2. What is the yield to maturity using the trial-and-error approach with annual calculations? (20 pts)

3. Why is the current yield higher/lower than the yield to maturity? (5 pts)

Problem 3: Conversion term and downside risk (35 pts) A convertible bond has a face value of $1,000 and the conversion price is $50 per share. The stock is selling at $40 per share. The bond pays $70 per year in interest and is selling in the market for $950. It matures in 7 years. Market rates are 9% annually.

1. What is the conversion ratio? (5 pts)

2. What is the conversion value? (5 pts)

3. What is the conversion premium (in dollars and percent)? (5 pts)

4. What is the floor or pure bond value (using annual analysis)? (10 pts)

5. Compute the downside risk as a percentage. (10 pts)

Problem 4: Currency fluctuations and rates of return (30 points) Assume you invest in the European Equity Market and have a 15% return (quoted in Euros).

1. If during this period the euro appreciated by 10% against the dollar, what would be your actual return, translated into United States dollars? (15 pts)

2. What if the euro declined by 10% against the dollar, what would your actual return be, translated into dollars? (15pts)