C15.0002 FOUNDATIONS OF FINANCIAL MARKETS
Fall 2011
Problem Set #1
This problem set is due at the start of class, one class after session 3. No late assignments accep ted.
1. Consider zero coupon bonds with a face amount of $1,000. Fill in the following t
230
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Part 2
EDP-PETE”
Fixed income Securities
What is the band’s yield to maturity?
What is the bonds current yield?
What is the band’s capital gain or loss yield?
What is the bonds yield to call?
How would the price of the bond be
Part 3 Stocks and Options
9. Finally, you can also use the information in Thomson ONE to value the entire corporation,
This approach requires that you estimate XOM’s annual free cash ﬂows. Once you estimate
the value of the entire corporation, you subtrac
The Bond portion of the project
General Electric Capital Corp. coupon 4.65% maturity 6/ 15/2024
Purchase the bond on 6/15/2015
The YTM is 3.367%
What is the price of the bond?
If on 6/15/2016 yield on similar bonds are now yielding 3.85% what would the bo
Intro lecture
1.
2.
3.
4.
Basic concepts of finance
Investors prefer more to less
Investors are risk averse and must be compensated to take risks
Money paid in the future is worth less than money paid today
Financial markets are competitive no arbitrage
a
H8
Numerical Example of Creating a Zero Risk
Portfolio with Two Risky Securities Whose
Returns are Perfectly Negatively Correlated
Foundations of Finance
Prof. Alexi Savov
Good year
(P rob = 0.5)
Bad year
(P rob = 0.5)
16%
-2%
Security
2%
12%
A
B
Table 1:
Performance of securities / PV /FV/ Annuity
1.
What is the effective annual rate corresponding to an APR of 40% with weekly compounding?
(a) 34.23%
(b) 52.12%
(c) 42.88%
(d) 48.95%
2.
Your bank offers you a $60,000 mortgage loan at an annual 5.45% interes
Performance of securities / PV /FV/ Annuity
1.
What is the effective annual rate corresponding to an APR of 40% with weekly compounding?
(a) 34.23%
(b) 52.12%
(c) 42.88%
(d) 48.95%
2.
Your bank offers you a $60,000 mortgage loan at an annual 5.45% interes
Foundations of Finance
Practice Questions for Final Exam ANSWERS
Question 1
You have $100 to invest. The price of XYZ stock is $100. You sell short one share of XYZ
and then invest all available funds (your initial $100 and any short-sale proceeds) in one
Foundations of Finance
Practice Questions for Final Exam
Question 1
You have $100 to invest. The price of XYZ stock is $100. You sell short one share of XYZ
and then invest all available funds (your initial $100 and any short-sale proceeds) in oneyear zer
NAME: _
(9 POINTS)
ANSWERS
MIDTERM EXAM Fall 2011 Professor Elton
MULTIPLE CHOICE QUESTIONS - 20 POINTS
1. You invest $1,000 in a portfolio for 2 years that has an arithmetic average annual return
of 0%. What is the ending value of the portfolio?
a. $1,00
3.) (10 points) What is the are three period fixed for floating swap rates given the following:
R01=5%
R02=6%
R03=7%
At initiation, both sides must be happy. Floating note is at par to make fixed at par.
100 = + +
C = 3.477 or coupon 6.954%
5.) (7.5 point
1.) Assume short sales are allowed. Given the following information, what is the tangency
portfolio?
a. (15 points)
Answer
b. (10 points) What is the equation of the efficient frontier? (if you didnt solve A,
assume an optimum mix and proceeds)
1.) (20 po
C15.0002 FOUNDATIONS OF FINANCIAL MARKETS
Fall 2010
Sample Final Solutions
Multiple choice questions
1. Which of the following risk-free securities has the lowest Macaulay duration (assuming the yields
on all the securities are identical)?
a. A 5-year, ze
C15.0002 FOUNDATIONS OF FINANCIAL MARKETS
Fall 2010
Sample Midterm Solutions
Multiple choice questions
1. A stock has a beta of 1.5 and a volatility (standard deviation) of 50%, and the volatility (standard de viation) of the market portfolio is 20%. What
Solutions to Homework 4
Prof. Jerey Wurgler
Topic 8: Fixed Income Securities
1. A zero coupon bond with 2.5 years to maturity has a yield to maturity of 25% per annum. A
3-year maturity annual-pay coupon bond has a face value of $1000 and a 25% coupon rat
Solutions to Homework 3
Prof. Jerey Wurgler
Topic 6: Arbitrage
1. The stock PolarBear.com trades on both the South Pole Stock Exchange and the North Pole
Stock Exchange.
(a) Suppose the price on the North Pole is $18. What does the No-Arbitrage Condition
Foundations of Finance
Homework 2, due at the start of class 11
Spring 2016, FINC-UB.0002.04
Topic 3: Portfolio Theory with 2 Risky Assets
1. The expected returns and standard deviation of returns for two securities are as follows:
Security Z
Security Y
1
3. Suppose todays stock price of Book.com is $100. With probability 60% the price will rise to
$130 in one year and with probability 40% it will fall to $80 in one year. A European put
option with a strike price of $90 and a time to expiration of one year
Foundations of Finance
Homework 1, due at the start of class 6
Spring 2016, FINC-UB.0002.04
Topic 1: Financial Markets
1.You are among the OTC market makers in the stock of Bio-Engineering, Inc. and quote a
bid of 102 1/4 and an ask of 102 1/2. Suppose th
Foundations of Finance
Solutions to Homework 3
Professors Theresa Kuchler, Richard Levich and Robert Whitelaw
Fall 2015
FINC-UB.0002.04, FINC-UB.0002.05, FINC-UB.0002.06
Topic 6: Equity Valuation
1. Suppose that the consensus forecast of security analysts
Foundations of Finance
Solutions to Homework 4
Professor Theresa Kuchler, Richard Levich and Robert Whitelaw
Fall 2015
FINC-UB.0002.04, FINC-UB.0002.05, FINC-UB.0002.06
Topic 8: Fixed Income Securities
1. A zero coupon bond with 2.5 years to maturity has
Foundations of Finance
Homework 1
Fall 2015 - FINC-UB.0002.04, FINC-UB.0002.05, FINC-UB.0002.06
Due at the start of Class 6
Topic 1: Financial Markets
1. You are among the OTC market makers in the stock of Bio-Engineering, Inc. and
quote a bid of 102 1/4
HW #6
Due with the Hubbles Law and the Expanding Universe lab.
You can use a calculator, but please show your work.
1. List the escape velocities for the following situations:
a)
b)
c)
The surface of the Earth, if it were compressed to a radius 1/4 the si