Problem Set 1
Foundations of Financial Markets
Instructor: Erin Smith
Summer 2011
Due date: Beginning of class, May 31
1. Suppose the debt holders of a cosmetics rm hold debt with a face value of $500
Problem Set 2
Foundations of Financial Markets
Instructor: Erin Smith
Summer 2011
Due date: Tuesday, June 7
1. Suppose you have 2 mutual funds whose annual returns are shown in the following
table. As
Concept Questions 2
Prof. Itamar Drechsler
1. As you increase the interest rate of an annuity, what happens to the present
value and the future value?
(a) They both go up.
(b) They both go down.
(c) T
Solutions to Concept Questions 3
Prof. Itamar Drechsler
1. Suppose that the return on the S&P 500 is a normally distributed random variable with mean (=expected value) of 12% and standard deviation
(=
Solutions to Concept Questions 5
Prof. Itamar Drechsler
1. What is the capital market line?
(a) It is the ecient frontier formed by the risk-free asset and the market portfolio
(b) It is the investmen
Solutions to Concept Questions 6
Prof. Itamar Drechsler
1. Which of the following statements accurately describes the ecient market
hypothesis?
(a) No one can ever outperform the market
(b) Stock pric
Solutions to Concept Questions 4
Prof.Itamar Drechsler
1. The set of ecient portfolios with 1 risky portfolio and 1 risk-free asset is
found as:
(a) the straight line through the risk-free rate and th
Solutions to Concept Questions 7
Prof. Itamar Drechsler
1. The Law of One Price states that
(a) any two securities must have the same price.
(b) a dealer has to charge the same price to every investor
Concept Questions 7
Prof. Itamar Drechsler
1. The Law of One Price states that
(a) any two securities must have the same price.
(b) a dealer has to charge the same price to every investor.
(c) any two
Concept Questions 6
Prof. Itamar Drechsler
1. Which of the following statements accurately describes the ecient market
hypothesis?
(a) No one can ever outperform the market
(b) Stock prices must go up
Concept Questions 4
Prof.Itamar Drechsler
1. The set of ecient portfolios with 1 risky portfolio and 1 risk-free asset is
found as:
(a) the straight line through the risk-free rate and the risky portf
Concept Questions 3
Prof. Itamar Drechsler
1. Suppose that the return on the S&P 500 is a normally distributed random variable with mean (=expected value) of 12% and standard deviation
(=volatility) o
Concept Questions 5
Prof. Itamar Drechsler
1. What is the capital market line?
(a) It is the ecient frontier formed by the risk-free asset and the market portfolio
(b) It is the investment opportunity
Concept Questions 8
Prof. Itamar Drechsler
1. The book value of a companys equity is equal to
(a) How much it would cost to set up a new company with the same assets and
liabilities than the existing
Concept Questions 11
Prof. Itamar Drechsler
1. Which one-year option strategy will give the highest expected net prot if
a. you are very condent that the stock price will move VERY LITTLE
over the nex
Concept Questions 1
Prof. Itamar Drechsler
1. Rank the following bonds from the most risky to the least risky:
(a) Treasury bonds, Corporate bonds, Municipal bonds.
(b) Municipal bonds, Corporate bond
Concept Questions 9
Prof. Itamar Drechsler
1. A bond with face value $100 that is issued at a price of $105:
(a) is a discount bond
(b) is a par bond
(c) is a premium bond
(d) does not exist because n
Solutions to Concept Questions 8
Prof. Itamar Drechsler
1. The book value of a companys equity is equal to
(a) How much it would cost to set up a new company with the same assets and
liabilities than
Solutions to Concept Questions 10
Prof. Itamar Drechsler
1. Question Which of the following factors unambiguously cause an increase
in the duration of a coupon paying bond?
(a) an increase in maturity
Solutions to Concept Questions 9
Prof. Itamar Drechsler
1. A bond with face value $100 that is issued at a price of $105:
(a) is a discount bond
(b) is a par bond
(c) is a premium bond
(d) does not ex
=
SOLUTIONS AND EXPLANATION FOR MINI-QUIZ 1
The original question is in bold below. I only graded parts (1) and (2) of the
question as many of you seemed confused on the third section. Additionally, I
MINI-QUIZ 2
Your sister owes you $500. She doesnt have the money today, however she oers
you two options:
(1) She will pay you $600 in two years
(2) She will pay you $250 in one year and $300 in two y
MINI-QUIZ 3 SOLUTION
NAME:
The return on the equity market is 10% and the risk-free rate is 2%.
You have $100 to invest and you want an expected return of 8%.
How much should you invest in the equity
C15.0002.01
Foundations of Financial Markets
Summer 2011
May 24, 2011 to June 30, 2011
Course Details
Instructor: Erin Smith
E-mail: [email protected]
Class Meeting Time: Tuesdays and Thursdays 12:
Rhyme z 0
William L. Sllber - Foundations of Finance (301.2311)
Summary of Yield Measures
l. Zeros
1. Yield to Maturity (t = years to maturity) . 1
a) Annual Compounding = 4 or [ET _1
l
b) Semi-annual
#0!
Calculetlng the Annual Return (Realized Compound Yield) on a Coupon Bond
William L. Silber
Objective:
To ahcw that the annual return actually earned on a couponbeeng bond will equal ite
yield to m
WW 7 A
Equity Valuation Formulas
William L. Silber and Jessica Wachter
l. The Dividend Discount Model
Suppose a stock with price Po pays dividend D1 one year from nowr Dg two years from
now, and so on
ew 1&7
Arbitrage handout, 801.2311
Prof. Stiju Van Nienwerburgh
1 Introduction
Our working denition so far was: Arhitragc is the transaction of selling something at a
high price and simultaneously buy
H08
Numerical Example of Creating a Zero Rlslt Portfolio with Two Risky
Securities Whose Returns are Perfectly Negatively Correlated
William L. Silb'er
Possible Outcomes
Good Year (Pr=.5) Bad Year (Pr