CHE374F-PS02 - ି଼/ଵ ൅200*ሺ1 ൅ 2.9% ିଵଵ/ଵ ൌ 1101.949 Question#2 R ୡୀ 2.5 ൅ 1.32ሺ6 െ 2.5% ൌ 7.12 Since the

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CHE374F – PS #2 Solution – 2009 Question #1: Maturity (Months) T-Bill Price Annual Effective Interest Continuous 3 99.75 1.000% 0.995% 6 99.01 2.000% 1.980% 9 98.02 2.700% 2.664% 12 97.09 3.000% 2.956% Assume the risk-free rate for the first three months is flat (i.e. the three month rate is equivalent to the one month or two month rate). a) ݎ ௘௙௙ 1% T bill price = 100 * ሺ1 ൅ 1%ሻ ିଵ/ଵଶ = 99.9171 Use linear interpolation: b) ି௥ ଺ିଷ ି௥ ఱ.ఱ ଺ିହ.ହ ݎ ௘௙௙ 1.83% T bill price = 100 * ሺ1 ൅ 1.83%ሻ ିହ.ହ/ଵଶ = 99.1723 c) భమ ି௥ ଵଶିଽ భమ ି௥ భబ ଵଶିଵ଴ ݎ ௘௙௙ 2.8% T bill price = 100 * ሺ1 ൅ 2.8%ሻ ିଵ଴/ଵଶ = 97.7250 Maturity (Months) Effective Annual Interest 1 1.00% 4 1.33% 7 2.23% 8 2.47% 11 2.90% Present worth ൌ 1000 * ሺ1 ൅ 1%ሻ ିଵ/ଵଶ ൅400*ሺ1 ൅ 1.33%ሻ ିସ/ଵଶ ൅500*ሺ1 ൅ 2.23%ሻ ି଻/ଵଶ 1000*ሺ1 ൅ 2.47%ሻ
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ି଼/ଵଶ ൅200*ሺ1 ൅ 2.9%ሻ ିଵଵ/ଵଶ ൌ 1101.949 Question #2: R ୡୀ 2.5% ൅ 1.32ሺ6% െ 2.5%ሻ ൌ 7.12% Since the project is labeled as risky, you would expect a return greater than the 7.12% rate of return expected by the shareholders (market) Question #3: Scenario (1): Invest $1(CAD) at CAD risk ‐ free rate ܨ ൌ 1 כ ݁ ଷ% Scenario (2): Invest $.93(USD) at USD risk ‐ free rate and convert it to CAD at the end of the year F = .ଽଷכ௘ భ.ఱ% ி௑ To avoid arbitrage both investment should have the same value: 1 כ ݁ ଷ% = .ଽଷכ௘ భ.ఱ% ி௑ FX = .916 USD/CAD The proposed bail ‐ out package is going to cost the US government a lot of money and lead to higher inflation in the US, leading to a higher risk ‐ free rate. This would have the effect of weakening the USD and thus the USD/CAD FX rate would increase....
View Full Document

This note was uploaded on 10/18/2010 for the course ENGINEERIN CHE374 taught by Professor Y.lawrynshyn during the Fall '09 term at University of Toronto- Toronto.

Page1 / 2

CHE374F-PS02 - ି଼/ଵ ൅200*ሺ1 ൅ 2.9% ିଵଵ/ଵ ൌ 1101.949 Question#2 R ୡୀ 2.5 ൅ 1.32ሺ6 െ 2.5% ൌ 7.12 Since the

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online