S11_practice_final

S11_practice_final - Economics 172 Intermediate Finance...

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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 one-year 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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Economics 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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S11_practice_final - Economics 172 Intermediate Finance...

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