Class 21: The Efficient Frontier
COMM 298
Complete Notes
Cornelia Kullmann
What is the Efficient Frontier?
The portfolio frontier is a graphical representation of the risk/return
combinations we can achieve by combining assets into portfolios.
In this p

Class 22: The CAPM
COMM 298
Complete Notes
Cornelia Kullmann
Recall: The Efficient Frontier
The portfolio frontier is a graphical representation of the risk/return
combinations we can achieve by combining assets into portfolios.
In this part of the cour

Commerce 298
Lecture 2A:
Interest Rates and Compounding
Objectives
By the end of this class, you should be able to:
Define and calculate effective periodic rates
of interest.
Distinguish between APR rates and effective
periodic rates.
Determine the eff

C298 Practice Problem Set #7
1. What are the characteristics of an efficient market?
2. Net Present Value (NPV) is equal to the PV of the benefits minus the PV of the costs of an
investment. If securities markets are efficient, what is the NPV of any secu

Solutions to C298 Practice Problem Set #7
1. An efficient market is one where current prices quickly and accurately reflect all relevant and
available information. In an efficient market, securities can be traded easily, quickly, and at
low cost. Markets

C298 Practice Problem Set #8
Question #1
A university athletic department is considering replacing the natural grass turf in its stadium
with artificial turf. By putting artificial turf in the stadium, the university would have better
playing conditions f

Solution to C298 Practice Problem Set #6
1.
so the realized return will be
r
=
=
=
2.
16.67%
so the realized return will be
r
=
=
=
16.63%
3.
=
=
=
4.
$21
=
30
=
6 !30g
g
=
=
3
0.10
5.
We know that F = 1000, c = 0.07, and cF = 70.
First, we must calculate

C298 Practice Problem Set #4
Note: some of these questions involve solving for yield to maturity (YTM). On an exam,
you will not be asked to solve for YTM using trial and error. However, you will develop
good intuition about bond prices and yields by solv

C298 Practice Problem Set #6
1.
Suppose you bought one share of Pouce Coupe Resorts (PCR) one year ago for $9.
Today, you received a dividend payment of $1 and sold the share for $9.50. What was
your realized return on PCR over the last year?
2.
Suppose y

Solutions to C298 Practice Problem Set #4
1 (1.12) 2
2
1. (a) P 100
1,000(1.12) $966.20
.12
20
1 (1.12)
20
(b) P 100
1,000(1.12) $850.61
.12
(c) P
100
$833.33
.12
2. (a) The equation to be solved for the effective periodic yield, rannual , is:
1 (

C298 Practice Problem Set #5
1. ABC International has issued $1,000 face value bonds that pay coupons
semiannually. The coupon rate is 8% and the bonds have 20 years until maturity.
(a) If you require a YTM of 9% for a bond of this risk, how much would yo

C298 Practice Problem Set #3
1. The rule of 72 states that money doubles whenever interest rates and time multiplied
together equal 72. How close is this for the following rates and times: (a) 6%, 12 years;
(b) 12%, 6 years; (c) 36%, 2 years?
2. After get

C298 Practice Problem Set #2
1. (a) If $2,000 is placed in a savings account at the end of each year for 5 years, what is the
value of this account at the end of the fifth year, given that money paid into the account
earns 10 percent simple interest?
(b)

C298 Practice Problem Set #1
1. (a) An $8,000 loan calls for simple interest payments of 9 percent per year. Repayment
of principal and all accumulated interest is to be made at the end of year 4. What amount
needs to be repaid?
(b) Assume the same loan a

Contract versus Personal Rate
The contract interest rate (specified in the
contract with the lender) determines the
payments.
The borrowers personal interest rate (or
personal opportunity cost of capital)
determines the PV of the payments to the
borrower.

Commerce 298
Lecture 4A:
Bonds
Objectives
By the end of this class, you should be able to:
Develop the basic bond valuation formula.
Explain the relation between bond prices and
interest rates.
Calculate the price of a perpetual bond.
Determine which

Class 5: APRs vs. EARs Contd
COMM 298 Introduction to Finance
Complete Notes
Cornelia Kullmann
1
iClicker Example: Compounding
What is the future value of $1 three years from now if the interest
rate is 12% compounded quarterly?
a) $ 1.4258
b) $ 3.8960
c

Class 4: Compounding Frequencies: APRs vs. EARs
COMM 298 Introduction to Finance
Cornelia Kullmann
1
iClicker Example: Multiple Cash Flows
Tims aunt and uncle give him $500 for his birthday each year (they are very
predictable). Its Tims 19th birthday and

Class 2: The Time Value of Money
COMM 298 Introduction to Finance
Cornelia Kullmann
Objectives
In this class we learn how to compare sums of money received at
different points in time.
Simple interest
Compound interest
Visual aid: Time lines
To be ab

Class 23 Last Class: The CAPM and WACC
COMM 298
Complete Notes
Cornelia Kullmann
Objectives
Understand the implications of the Capital Asset Pricing Model
(CAPM pronounced Cap M) for determining the expected (or
required) rate of return for any risky ass

Garbage Truck Mini-Case
The City of Prince George is considering investing in a new automated garbage
collection system. Under the proposed new system, garbage would be collected
using a mechanical arm on a garbage truck instead of workers lifting cans an

Commerce 298
Lecture 10B:
What-If Analysis
Objectives
By the end of this class, you should be able to
Use sensitivity, scenario and NPV break-even
analysis to see how project profitability would
be affected by a change in forecasting.
Distinguish betwee

Commerce 298
Lecture 10A:
Making Capital Investment
Decisions
Objectives
By the end of this class, you should be able to:
Determine cash flows related to changes in net
working capital.
Separate investment and financing decisions.
Apply capital budgeti

Commerce 298
Lecture 9B:
Making Capital Investment
Decisions
Objectives
By the end of this class, you should be able to:
Analyze different types of project cash flows.
Determine what information is relevant to the
investment decision and what is not relev

Commerce 298
Lecture 11B:
Risk & Return
Objectives
By the end of this class, you should be able to:
Define risk and establish a risk measure.
Calculate the variance and standard
deviation of returns for a portfolio.
Determine the benefits of and limits

Commerce 298
Lecture 9A:
NPV & Other Investment Criteria
Objectives
By the end of this class, you should be able to:
Describe and apply the Payback Rule and
explain its limitations.
Calculate the Net Present Value of a project
and apply the NPV decision

Commerce 298
Lecture 8B:
Market Efficiency
Objectives
By the end of this class, you should be able to:
Distinguish between the three forms of the
Efficient Markets Hypothesis.
Discuss the implications of each form.
Review some of the evidence on market

Commerce 298
Lecture 11A:
Intro to Risk & Return
Objectives
By the end of this class, you should be able to
Describe the historical evidence on return on
various investments.
Calculate expected values, variances, and
standard deviations.
Calculate and