COR1-GB.2311 FOUNDATIONS OF FINANCE
Spring 2015
Problem Set #2 Solutions
1. Consider portfolios with positions in the US and Brazilian equity markets. The (annual) expected
return and standard deviation of returns for the 2 markets are as follows:
US
Braz

William L. Silber
Foundations of Finance (COR1-GB.2311)
Spring 2015
PROBLEM SET SOLUTIONS
Problem Set III
Problem 1
A) For annual compounding recall that PV(1+r)t = FV. It is given that the one-year rate
(tR1 or r1 for short) is 10%, and the future value

COR1-GB.2311 FOUNDATIONS OF FINANCE
Spring 2015
Problem Set #1 Solutions
1. Consider zero coupon bonds with a face amount of $1,000. Fill in the following table
with the prices of bonds with the stated maturity (in years) at the stated annually
compounded

William L. Silber
Foundations of Finance (COR1-GB.2311)
Spring 2015
COMPLETE PROBLEM SET
QUESTIONS
Page
PROBLEM SET I
3
PROBLEM SET II
5
REAL TIME EXERCISE: EQUITIES
9
PROBLEM SET III
10
PROBLEM SET IV
13
1
INTRODUCTION
These problem sets are not represen

William L. Silber
Foundations of Finance (COR1-GB.2311)
Spring 2015
PROBLEM SET SOLUTIONS
Problem Set I
Problem 1
A) You have sold 10,000 shares at the offer price of 102 1/2. You bought 4,000 shares at a bid
price 102 1/4. Thus, 6,000 shares are sold sho

William L. Silber
Foundations of Finance (COR1-GB.2311)
Spring 2015
PROBLEM SET SOLUTIONS
Problem Set II
Problem 1
A)
i)
Security 2 has a higher return than Security 1 (R2=.16 while R1=.10)
ii)
Security 1 has a lower variance of return, and thus has lower

FOUNDATIONS OF FINANCE
Spring 2015
Midterm Exam Formula Sheet
Time value of money:
FV PV (1 r )
FV PV e rt
ln FV
PV FV e rt
1t
PV r FV 1
t
ln(1 r )
PV
ln FV
ln FV
PV r
PV
t
r
t
FV
PV
(1 r )t
t
1t
V
annualized HPR t 1
V
0
1
1
C
V (annuity) C
V (pe

Foundations of Finance
Final Practice Questions
Professor Haran Segram
1
Multiple Choice Questions
The following are sample questions for the multiple choice section. They are organized by
degree of diculty (this ranking is a bit subjective).
1.1
Easy
1.

William L. Silber
Foundations of Finance (COR1-GB.2311)
Equilibrium Term Structure under the Expectations Theory
PART I
Given:
tR1
To Prove:
Equilibrium tR2 = [(l .02)(1.04)]1/2 -1 = .02995 .03
Approach:
Assume tR2 = .02995 = .03 and examine investor hold

Foundations of Finance
Midterm Practice Questions
Professor Haran Segram
1
Multiple Choice Questions
The following are sample questions for the multiple choice section. They are organized by
degree of diculty (this ranking is a bit subjective).
1.1
Easy
1

AN EXAMPLE OF FINANCIAL ENGINEERING:
CONSTRUCTING A FORWARD LOAN FROM SPOT SECURITIES
William L. Silber
OBJECTIVE:
You wish to guarantee that you will be able to lend the $1,000,000 you will
inherit at the beginning of next year from your rich aunt's esta

Concept Questions 1
Prof. Johannes Stroebel
1. Rank the following bonds from the most risky to the least risky:
(a) Treasury bonds, Corporate bonds, Municipal bonds.
(b) Municipal bonds, Corporate bonds, Treasury bonds.
(c) Corporate bonds, Treasury bonds

Bankruptcy order: govt, employees, bondholders, preferred/common stockholders. Call (put) option: Right to buy (sell) an asset.
Long (short) future: Obligation to buy (sell) an asset. Auction market (NYSE): Includes market makers, who set bid/ask prices
(

Bankruptcy order: govt, employees, bondholders, preferred/common stockholders. Call (put) option: Right to buy (sell) an asset.
Long (short) future: Obligation to buy (sell) an asset. Auction market (NYSE): Includes market makers, who set bid/ask prices
(

Maturity Portfolio PV of bonds Bond price
weight
with y=
with y=
0.06
0.06
No. of bonds Year 15 FV Bond price PV of bonds Year 15 FV
(millions)
with y=
with y=
with y=
with y=
0.06
0.07
0.07
0.07
Liabilities
15
41.727
41.727
1.000
100.000
36.245
36.245
10

Black and Scholes formula
Initial stock price
Strike price
Risk-free rate (annual)
Expiration (years)
Dividend rate (annual)
Stock price volatility (annual)
S0
X
r
T
delta
sigma
Option Price
d1
d2
C
a
b
c
a-b+c
d
a-b+c+d
Components
intrinsic value
PV of d

Syllabus Foundations of Finance
Fall Semester 2015
COR1-GB.2311 Sections 10 & 11 & 12
1
Instructor
Professor Johannes Stroebel
Oce: KMEC 9th Floor (9-98); Email: johannes.stroebel@stern.nyu.edu
Oce Hours: I will do formal oce hours Wednesdays 4.50pm to 5.

Midterm Review
Todays Class
This is a very brief overview of some important topics in the first half
of the class
It is NOT a comprehensive list of the topics that will be covered in the
exam!
Second half to answer your questions
There should be no su

Financial Calculator Tutorial
Foundations of Finance
Outline
Getting started
A simple cash flow
Multiple cash flows
Annuity
NPV
IRR
Getting started
Three major types of financial
calculators for this class:
HP 12C
Small, handy and classical
HP-12

Sample Final, COR1-GB.2311
Prof. Johannes Stroebel
1
Multiple Choice Questions
The following are sample questions for the multiple choice section. They are organized by
degree of diculty (this ranking is a bit subjective).
1.1
Easy
1. If the (positive) yi

Sample Midterm, COR1-GB.2311
Prof. Johannes Stroebel
1
Multiple Choice Questions
The following are sample questions for the multiple choice section. They are organized by
degree of diculty (this ranking is a bit subjective).
1.1
Easy
1. Security A has a h

William L. Silber
Foundations of Finance (B01.2311)
Numerical Example of the Arbitrage
When Calls Violate the Minimum Value Prior to Expiration
1. Prior to expiration, the minimum value is:
C$ Max [0, S - Ee-rt]
2. Suppose S = $101 E = $100 r = .06 t = 1

Numerical Example of Creating a Zero Risk Portfolio with Two Risky
Securities Whose Returns are Perfectly Negatively Correlated
William L. Silber
Possible Outcomes
Good Year (Pr=.5)
Bad Year (Pr. = .5)
Security
A
16%
2%
B
-2%
12%
Notes:
1) The data in the

William L. Silber
Foundations of Finance (COR1-GB.2311)
Summary of Yield Measures
I. T-Bills
1.
(F P )
(Bank) Discount Yield =
F
t,
x
t =
360
The number of days to maturity equals x.
Problems:
2.
Bond Yield Equivalent =
Problems:
3.
(i) Uses F in d

Foundations of Finance (COR1-GB.2311)
Spring 2015
William L. Silber
Homepage: www.stern.nyu.edu/~wsilber
Email: wsilber@stern.nyu.edu
SYLLABUS
Texts
(BKM) Bodie, Kane and Marcus, Essentials of Investments, 9th edition, Irwin, 2013.
(RWJ) Ross, Westerfield