Problem Set Solutions
Foundations of Finance
Problem Set 1 Solution: Time Value of Money and Equity Markets I. Present Value with Multiple Cash Flows: 0
1
2
3
A: B: 30000
40000 20000
40000 20000
APR is 16% compounded quarterly; Periodic Rate (with quarter
Practice Midterm Questions
Foundations of Finance
Foundations of Finance Practice Midterm Questions Prof. Anthony Lynch I. [15 points] You will be making 20 annual contributions of $75 to a bank account (the first is made at the end of year 1) that pays a
Lecture 16 Lecture 16: Fixed Income Markets. I. Reading. A. BKM, Chapter 2, Sections 2.1 and 2.2. B. BKM, Chapter 14, Sections 14.1-14.4.
Foundations of Finance
II.
Money Market. A. Definition. 1. Money market instruments are those with maturities of one
Lectures 13-14
Foundations of Finance
Lectures 13-14: Asset Pricing Model Evidence and Market Efficiency I. Reading. A. BKM, Chapter 13, Sections 13.1-13.3. B. BKM, Chapter 12. Read Sections 12.1 and 12.2 but only skim Sections 12.3 and 12.4. Time series
Lecture 9
Foundations of Finance
Lecture 9: Portfolio Management - N Risky Assets and a Riskless Asset I. II. Reading. A. BKM, Chapter 8, Sections 8.4 and 8.5 and Appendix 8.A. Standard Deviation of Portfolio Return: N Risky Assets. 1. Formula.
N N
2[Rp(t
Lecture 8
Foundations of Finance
Lecture 8: Portfolio Management-2 Risky Assets and a Riskless Asset. I. II. Reading. A. BKM, Chapter 8: read Sections 8.1 to 8.3. Standard Deviation of Portfolio Return: Two Risky Assets. A. Formula:
2 2
2[Rp(t)] 1,p [R1(t
Investment A E 1M
Payoff Good State 2M 1.75M
Payoff Bad State 1M 0.75M
E[R] 50% 25%
[R] 50% 50%
A F
2M 2.4M
1M 0.6M
50% 50%
50% 90%
A D
2M 2.4M
1M 0.8M
50% 60%
50% 80%
Lecture 3 Lecture 3: Equities: Characteristics and Markets I.
Foundations of Finance
Reading. A. BKM Chapter 3: Sections 3.2-3.5 and 3.8 are the most closely related to the material covered here. Terminology. A. Bid Price: 1. Price at which an intermediar
Lectures 1-2 Lectures 1-2: Time Value of Money I. Reading A. RWJ Chapter 5.
Foundations of Finance
II.
Time Line A. $1 received today is not the same as a $1 received in one period's time; the timing of a cash flow affects its value. B. Hence, when valuin
Problem Set Questions Problem Set 1: Time Value of Money and Equity Markets. I-III can be started after Lecture 1. IV-VI can be started after Lecture 2. VII can be started after Lecture 3. VIII and IX can be started after Lecture 5. I.
Foundations of Fina