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Midterm #2 – Winter 2016 – Econ 134AFebruary 29, 2016Test Form AName (Please Print) : ______________________________________Seat:_____________Has the person sitting to YOUR RIGHT given you a valid photo ID that matches the one written on the top of their cover sheet? If the seat to your right is empty, check the ID of the next person to the right.____Yes____ No____There is no person to my rightHas the person sitting to YOUR LEFT given you a valid photo ID that matches the one written the top of their cover sheet? If the seat to your left is empty, check the ID of the next person to the left.____Yes____No____There is no person to my leftName (Please print your name):____________________________________________Signature_____________________________________________________Econ 134AJohn HartmanTest 2, Form AFebruary 29, 2016Instructions:YOU WILL TURN IN YOUR SCANTRON AND THE PROBLEMS PAGE. MAKE SURE ALL WORK AND ANSWERS ARE PROVIDED ON THESE. BUBBLE IN YOUR TEST FORM, NAME, AND PERM NUMBER ON YOUR SCANTRON.You have 40 minutes to complete this test, unless you arrive late. Late arrival will lower the time available to you, and you must finish at the same time as all other students.Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant authorities on this issue.You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a communication device. You are NOT allowed to have a calculator that stores formulas, buttons that automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these requirements, you will be assumed to be cheating.Unless otherwise specified, you can assume the following:Negative internal rates of return are not possible.Equivalent annual cost problems are in real dollars.You are allowed to turn in your test early if there are at least 10 minutes remaining. As a courtesy to your classmates, you will not be allowed to leave during the final 10 minutes of the test.Your test should have 5 multiple choice questions (10 points) and 2 problems (13 points). The maximum possible point total is 24 points. If your test is incomplete, it is your responsibility to notify a proctor to get a new test.365569562230Grading:Filling in scantron correctly, putting name, perm #, and section day/time on problems page,& having photo ID ___/1(automatic unless something is incorrect)Multiple choice portion _____/10Problems _____/13Total score _____/2400Grading:Filling in scantron correctly, putting name, perm #, and section day/time on problems page,& having photo ID ___/1(automatic unless something is incorrect)Multiple choice portion _____/10Problems _____/13Total score _____/24For your reference, an example of a well-labeled graph is below:MULTIPLE CHOICE: Answer the following questions on your scantron. Each correct answer is worth 2 points. All incorrect or blank answers are worth 0 points. If there is an answer that does not exactly match the correct answer, choose the closest answer.1. The face value of a bond is $5,000. Annual coupons equal to 10% of the face value will be paid once per year starting one year from today, and the bond will mature 9 years from today. The bond currently sells for $4,600. Which of the following must be true about the yield to maturity?(a) It must be equal to 10%(b) It must be more than 8% and less than 10%(c) It must be more than 10%(d) It must be less than 8%(e) None of the above2. A zero-coupon bond sells for $500 today and will pay a face value of $700 on the date of maturity 18 months from today. What is the effective annual rate of return for this bond?(a) 40%(b) 30%(c) 27%(d) 25%(e) 20%Use the following information to answer the next two questions: Baby Blue Bird Ballet, Inc. has a known distribution, with a rate of return of 6% two-thirds of the time, and 21% one-third of the time. A risk-free bond always has a 9% rate of return.3. What is the covariance of the rate of return for these two assets?(a) –0.002(b) –0.001(c) 0(d) 0.001(e) 0.0024. What is the standard deviation of a portfolio with 50% of each asset?(a) 3.0%(b) 3.5%(c) 4.0%(d) 4.5%(e) 5.0%5. A project has a cash inflow today, a cash outflow one year from today, and a cash inflow two years from today. (Note that a cash outflow means you have to pay money and a cash inflow means you receive money.) Two internal rates are found, 13% and 40%. Darryl is trying to determine whether or not net present values (NPVs) are positive for 5%, 20%, and 60% discount rates. For which of these three discount rates will the NPV be positive?(a) 5% only(b) 20% only(c) 60% only(d) all three rates(e) 5% and 60% onlyName___________________ Perm #____________ Day/time/TA of section_____________________For the following problems, you will need to write out the solution. You must show all work to receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least four significant digits to each answer or you may not receive full credit for a correct solution. Show all work in order to receive credit. You will receive partial credit for incorrect solutions in some instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and correct solution.6. (6 points) A stock with a beta value of 3 will pay annual dividends on today’s date starting one year from today. The first dividend will be $8 one year from today, and the annual growth rate of the stock will be 20% per year. The market rate of return is 25% and the risk-free rate of return is 15%. What is the present value of the stock? 7. (7 points) There are three known states of the world, each with one-third probability of occurring: Good, Bad, and Ugly. When times are Good, Stock X has a rate of return of 40%, and stock Y has a rate of return of 4%. When times are Bad, Stock X has a rate of return of 10% and Stock Y has a rate of return of 3%. When times are Ugly, Stock X has a rate of return of –20% and Stock Y has a rate of return of 20%. What is the correlation of Stock X and Y’s rate of return?NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS EXPLICITLY SPECIFIED ON THE TEST.PerpetuityAnnuityGrowing perpetuityGrowing annuityQuadratic formulaax2 + bx + c = 0 Logarithmic ruleab = c b = log c / log aVariance of a sampleVariance of a distribution, with each outcome having the same probability of occurringCovariance formulaCorrelation of A and B, where SD stands for standard deviationVariance of a portfolio ................
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