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Unformatted text preview: Economics 136. Financial Economics Midterm 1, Fall 2009, Suggested solutions 1. True or false. (25 points, 5 each) (i) False. As time passes, the maturity of Treasury bonds falls. With an upward sloping and constant yield curve this means lower yields, or equivalently, higher prices. (ii) False. A value weighted portfolio means that you hold a constant share of the market in your portfolio. This is in general di/erent from holding an equal number of shares of each asset: for example, you will hold many more shares of a company with large market capitalization like MSFT, then a small company. (iii) True. Putcall parity says C + X= (1 + R f ) = P + S . If the right hand side P + S increases by $2 & $1 , then so must the lefthand side &since X= (1 + R f ) is constant, this means C must increase by a dollar. (iv) True. The real net simple return is (27 : 85 + : 5) = 25 = (1 : 08) & 1 = : 05 or 5 %. (v) True. A bond trading at face value would have a yield to maturity that equals the coupon rate of 4 : 5% . This bond has a lower price &since prices and yields in opposite direction, it must have a higher yield....
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 Fall '08
 SZEIDL

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