FIN500
Introduction to Finance
Bond Pricing
Lecture Notes Set #3:
Bonds cont.;
Duration & Convexity
Matt Marcinkowski, 2013
Matt Marcinkowski, 2013
FIN500
-1-
Bond Pricing
-2-
Bond Pricing
The price of a bond at any given point in time is the present
val
Team Assignment 1 ( due: Thursday, February 4 )
1.
On September 1, 2004, Susan Chao bought a car for $ 25,000. She paid $ 3,000 down and
financed the balance with a six-year loan at a stated annual interest rate of 10.8 percent,
compounded monthly. She st
FIN500
Introduction to Finance
Capital Structure
Lecture Notes Set #22:
Capital Structure; Payout policy
Matt Marcinkowski, 2013
Matt Marcinkowski, 2013
FIN500
-1-
Introduction
-2-
The benefits and costs of debt
The issue of capital structure: What mix o
Finance 500
Introduction to Finance
Fall 2014
Adam D. Clark-Joseph
Problem Set 1
Questions 1, 2 and 3 are each worth 1 point; questions 4,6,7,8 are each worth 2 points and
question 5 is worth 4 points. Total points available: 15.
Our grader suggests that
Finance 500
Introduction to Finance
Fall 2014
Adam Clark-Joseph
Problem Set 2
Due Monday, September 22, 2014 before 9:31am
Questions 1 and 2 are each worth 2 points; question 3 is worth 1 point; and Questions 4 and 5
are worth 2 points; questions 6 and 7
Finance 500
Introduction to Finance
Fall 2014
Adam D. Clark-Joseph
Problem Set 3
Due Wednesday, October 1, 2014 before 9:31am
Our grader suggests that you submit your computations in the form of an Excel file via
COMPASS. Because you can enter text into a
Finance 500
Introduction to Finance
Fall 2014
Adam D. Clark-Joseph
Problem Set 4
Due Monday, October 13, 2014 before 9:31am
Question 1 is worth a total of 10 points; question 2 is worth 2 points, and question 3 is worth 3
points.
Instructions. This is a G
Finance 500
Introduction to Finance
Fall 2014
Adam Danial Clark-Joseph
Problem Set 5
Due Wednesday, 22 October 2014 before 9:31am
Total of 15 points
Question 1 is worth 3 points, question 2 is worth 4 points, question 3 is worth 2 points, and
questions 4
Finance 500
Introduction to Finance
Fall 2014
Adam D. Clark-Joseph
Problem Set 6
Due Friday, 7th November 2014 before 11:59 PM
Total of 15 points
Instructions. The file PS6_Q1_data_2014.xls has eleven tabs. Ten of the eleven tabs contain
returns data, and
Finance 500
Introduction to Finance
Fall 2014
Adam D. Clark-Joseph
Problem Set 7
Due Wednesday, 19 November 2014, before 11:59PM
Total of 16 points
Instructions. For this assignment, plus submit a Microsoft Excel file. The file name should be
PS7.FAMILYNA
Finance 500
Introduction to Finance
Fall 2014
Adam D. Clark-Joseph
Problem Set 8
Due Tuesday, 9 December 2014, before 11:59PM
Total of 26 points
Instructions. For this assignment, please submit a PDF file. The file name should be
PS8.FAMILYNAME_GivenName.
2013-Like Midterm Examination
Family (last) name:
Given (first) name:
Instructions: There are five questions, worth a total of 60 points. You may bring and refer to
one 8.5 11 sheet of paper with formulas and notes. However, you may not use a laptop
compu
Midterm Examination #2
Family (last) name: Sample
Given (first) name: Midterm
Instructions: The time for the examination is 80 minutes. There are four questions, worth a
total of 40 points. You may bring and refer to one 8.5 11 sheet of paper with formula
FRAs (Continuing from last Wednesday)
Conclusions
FIN500: Introduction to Finance
Lecture 1 (Continuation)
Adam Clark-Joseph
University of Illinois Urbana-Champaign
Fall 2014
Adam Clark-Joseph
FIN500: Introduction to Finance
FRAs (Continuing from last Wed
Futures
FIN500
Introduction to Finance
Futures
Lecture Notes Set #15:
Introduction to Futures
Matt Marcinkowski, 2013
FIN500
Matt Marcinkowski, 2013
-1-
The Markets
-2-
The Contract
Spot market
Immediate delivery and payment (settlement is generally wit
Option Pricing
We know what an options value at expiration is
FIN500
Introduction to Finance
But, what is the value of the option before expiration date,
i.e., what amount of money (premium) do we have to pay
in order to receive the option right?
Two c
FIN500
Introduction to Finance
Investment Criteria
Lecture Notes Set #21:
Investment Criteria; Project
Interactions
Matt Marcinkowski, 2013
Matt Marcinkowski, 2013
FIN500
-1-
Net Present Value
-2-
Net Present Value
NPV: the present value of a projects ca
FIN500
Introduction to Finance
Callable bonds
Lecture Notes Set #4:
Callable and convertible
bonds
Matt Marcinkowski, 2013
Matt Marcinkowski, 2013
FIN500
-1-
Callable bonds
-2-
Callable bonds
112
A callable bond allows the issuer (borrower) to pay the
pri
Applications of TVM
FIN500
Introduction to Finance
Net Present Value
Internal Rate of Return
Lecture Notes Set #2:
Applications of TVM;
Intro to bond valuation.
Modified Internal Rate of Return (MIRR)
Matt Marcinkowski, 2013
FIN500
Matt Marcinkowski, 2
Time value of money
a)
FIN500
Introduction to Finance
Why is $100 today worth more than $100 a year
from today?
People would rather consume today than a year from now.
If you decide to invest, future cash flows are uncertain.
Inflation erodes the purchasi
Implementation of Markowitz
optimization
Markowitz portfolio selection can be
FIN500
Introduction to Finance
performed in Excel (for a limited
number of assets)
We will go over the steps involved next.
Lecture Notes Set #8:
Markowitz implementation;
Tob
Arbitrage Pricing Theory: Motivation
Can be thought of as an extension to CAPM,
although the mechanism that brings prices to
their equilibrium levels is different in APT.
Does away with many unreasonable
assumptions of CAPM (such as all investors
holdin
Sharpes Single Index Model
One problem with using Markowitz:
FIN500
Introduction to Finance
As the number of assets over which youre
optimizing rises, the number of inputs
increases enormously (see last set of notes
for details).
Lecture Notes Set #10:
S
Rolls Critique
In 1977, Richard Roll published a paper "A
FIN500
Introduction to Finance
critique of the asset pricing theory's tests
in the Journal of Financial Economics.
His argument applied to classic formulations
of CAPM.
Some aspects of his criti
FIN500
Introduction to Finance
PerformanceMeasurement
Lecture Notes Set #13:
Performance.
Matt Marcinkowski, 2013
FIN500
Matt Marcinkowski, 2013
-1-
Risk
Risk
Whenevaluatingperformance,weneed
formaladjustmentforrisk
(mayalsoadjustinformallyusingchoiceof
b
Finding an arbitrage portfolio
When assets are off the APT's
equivalent of the SML, it should be
possible to find a profitable arbitrage
portfolio
FIN500
Introduction to Finance
Lecture Notes Set #12:
APT cont.
Matt Marcinkowski, 2013
FIN500
Matt Marcinko
Holding Period Return (HPR)
For equities:
FIN500
Introduction to Finance
HPR = [Pt+1 Pt+ Dt]/Pt
where
Pt current (beginning) price
Pt+1 terminal price
Dt dividend (assumed to be paid at the
end of the period)
Lecture Notes Set #6:
Introduction to Modern P
Portfolios with many assets
Thus far, we have limited our
FIN500
Introduction to Finance
discussion to 2-asset portfolios.
What if we allowed more than 2 assets
to be included?
The expected return would still be very
easy to compute.
How about portfol
FIN500
Introduction to Finance
Introduction
Lecture Notes Set #16:
Introduction to Options
Matt Marcinkowski, 2013
Matt Marcinkowski, 2013
-1-
Options: Introduction
-2-
Options: Introduction
Consider a store discount coupon:
The coupon specifies:
IGA
Re