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Economics 136. Financial Economics
Midterm 1, Fall 2009
Write your name and section time on your blue book. You may use a calculator and
one double sided sheet of handwritten notes.
1. True or false.
(25 points, 5 each)
Are the following statements true or false? Explain your answer in no more than two
sentences. You will be graded on your explanation.
(i) If the yield curve is upward sloping and does not move over time, then the prices of
Treasury bonds are falling as time passes.
(ii) A valueweighted portfolio requires no rebalancing, because valueweighting implies
that one must hold an equal number of shares of all companies in the portfolio.
(iii) Consider a European call and a European put option on ABC stock with the same
strike price
X
and expiration date
T
. Suppose that, due to a change in market conditions,
the price of ABC stock increases by $
2
, and the put price falls by $
1
. If the riskfree rate is
unchanged, and LOOP holds, then the call price must increase by $
1
.
(iv) The stock price of MSFT on January 1 was $
25
; its stock price on December 31 was
$
27
:
85
; the company paid a dividend of $
:
50
rate was
8
% that year. Then the real simple net return of MSFT that year was
5
%.
(v) Consider a coupon bond with face value $
10
;
000
and maturity of
12
years which
makes coupon payments of $
450
once a year. If the price of this bond is $
9
;
980
, then it±s
yield to maturity must be higher than
4
:
5%
.
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 Fall '08
 SZEIDL

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