test_3_fall_2008 - Name 1 Common questions 1 You are given...

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Name 1 Common questions 1. You are given the following series of payments $100 at times t = 1 , 2 , 3 , . . . , 10 $200 at times t = 11 , 12 , 13 , . . . , 20 Answer the following Find the Macaulay duration of this sequence of payments. Define t * to be the time you receive $3000. When is t * if the $3000 and the sequence of payments both have equal present values?
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2. You purchase a 3 year $1000 par value bond with annual coupon rate 6%. Assume interest rates are described by the following spot rates Term Spot rate 1 6% 2 7% 3 8% Price this bond according to the given spot rates. Calculate the yield of this bond. Calculate the annual interest rate from year 2 to 3 implied by the spot rates.
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3. Options You purchase a long put option with strike price K = 100 and K = 200. Which has a higher premium? Why? Construct an investment strategy using put and call options that has upper and lower bounds on the payoff, pays well when the stock drops in price, and pays poorly when the stock increases in price. Sketch a graph and write the options purchased.
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4. You owe $100 in 7 years and $100 in 8 years.
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