Economics 172
Intermediate Finance
Spring 2011
SAMPLE
FINAL EXAM
1
Question 1
Consider the following prices for zero coupon bonds with $100 face value:
Maturity Price
1
$95.2381
2
$88.9996
3
$82.7849
(a) What is the yield to maturity of these bonds if the yield is compounded annually? (Report the
yields to two decimal places.)
(b) Using your results from (a), calculate the forward rate for a oneyear loan, one year from
today
(c) Suppose that the forward rate that you observe in the market is lower than the one you
computed in part (b). How would you take advantage of this discrepancy? Explain in detail
the transactions that you would conduct and the corresponding cashflows. Assume that you
can both borrow and lend at the yield levels that you calculated for the 3 bonds in part (a)
Question 2
Assume that you can either invest all of your wealth in one of two securities, 1 and 2, or some
proportion of your wealth in each. The securities have the following means and standard deviations:
Security
Expected Return
Standard Deviation
1
0.10
0.10
2
0.18
0.20
(a) What is the global minimum variance portfolio in the following cases?
Give the expected
return on the global minimum variance portfolio in each case and comment whether you obtain
gains from diversification if you invest in this portfolio or not.
(i) the two securities are perfectly positively correlated (r=1), and you are not allowed to
short sell any asset.
(ii) the two assets are perfectly positively correlated, but you can short sell any asset.
(iii) the two assets are perfectly negatively correlated.
(b) Suppose you can also invest in a risk free asset that has a return of 6%. Assume that
securities 1 and 2 are perfectly positively correlated, and you cannot short any risky security, but
you can borrow and lend at the risk free rate. Explain why any optimal portfolio will consist only
of the risk free asset and one of the risky securities. How do you choose between securities in
this case?
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View Full DocumentEconomics 172
Intermediate Finance
Spring 2011
SAMPLE
FINAL EXAM
2
Question 3
1.
A Wheat farmer expects to harvest 60,000 bushels of wheat in September. In order to pay
for the seed and equipment, the farmer had to draw $150,000 from his savings account on
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 Spring '11
 EMMARASIEL
 Economics, Capital Asset Pricing Model, minimum variance portfolio

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