finance-PSet2_Solutions - Coursera Wharton Foundation...

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Coursera Wharton Foundation Series Introduction to Corporate Finance Professor Franklin Allen Problem Set 2 Solutions 1. The correct answer is B only . Market-makers are not obligated to post prices equal to present values. Government regulations do not force prices to be equal to present values. It is the trading behavior of profit-seeking arbitrageurs acting in financial markets that make prices equal to the present value of their payoffs. If stock prices were always below the present value of their payoffs, arbitrageurs would buy the stocks (since they are undervalued), at which point the price rises until it equals the present value of their payoffs. If they are always above the present value of their payoffs, arbitrageurs would short-sell the stock, and prices would fall until they are equal to the present value of their payoffs. D is necessarily incorrect, since B is correct. 2. We apply the annuity factor to the coupon payments. (AF is annuity factor, DF is discount factor)
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