assignment1_Fall2016 2 - MGFC10H3(Intermediate Finance Assignment 1 Prof Michael Hasler Department of Management UTSC Due Date In class on October 5 or

# assignment1_Fall2016 2 - MGFC10H3(Intermediate Finance...

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MGFC10H3 (Intermediate Finance) – Assignment 1. Prof. Michael Hasler Department of Management UTSC Due Date: In class on October 5 or 6, 2016 Number of pages including the title page: 14 Please answer all the questions with pen. Answers written with pencil won’t be graded. Provide all your answers directly on the booklet. No additional sheets will be accepted. You can write on both sides of a page to answer the questions. Staple the pages before handing in. You have to work in groups. Always leave 2 decimals in the ( \$ ) numbers in your calculations (e.g. PMT = \$ 13.67) and, particularly, 4 decimals for interest rates, returns, volatilities, etc (e.g. r = 0.0875 or 8.75%) Name (First, Middle, and Last) + I.D. Number: 1. 2. 3. 4. Exercise No. Max. No. of Points Points Obtained 1. 22 llllllllllllll 2. 39 llllllllllllll 3. 39 llllllllllllll Total 100 llllllllllllll 1
Exercise 1. Pricing Formulas ( Total of 22 points ) The following formula will be needed: n i =0 x i = 1 - x n +1 1 - x 1) An asset with price S at time 0 pays some cashflows. The cashflows are worth C 1 with probability p 1 , C 2 with probability p 2 , and C 3 with probability 1 - p 1 - p 2 . These cashflows are paid every n months (perpetuity). Provide a formula for the asset price S by assuming that the (annualized) discount rate is r . 2) An asset with price S at time 0 pays some cashflows. Perpetual cashflows worth C a are paid every odd years (1, 3, 5,...). In addition, perpetual cashflows worth C b are paid every even years (2, 4, 6,...). Provide a formula for the asset price

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