UNIT 6 Practice Problem Set - ANSWERS 1)Asset Stock A Stock B Risk-free Expected return 15% 10% 5% Standard deviation 60% 30%
The correlation coefficient between stock A and B is 10%. Find the equation for the optimal CAL.
E (rp ) rf wA (.15) (1 wA )(.10)
University of Florida Warrington College of Business Administration
FIN4243 Debt & Money Markets Instructor: Jongsub Lee Fall 2010
Final Examination: Total 100 points Time Limit: Maximum 2 hours
Name: Section Number: 3021 UFID Number:
I will n
FIN 4243 Homework #1 Due on 9/14/2009 1. Give three reasons why the maturity of a bond is important.
2. A pension fund manager knows that the following liabilities must be satisfied: Years from Now Liability (in millions) 1 2.0 2 3.0 3 5.4 4 5.8 Suppose t
University of Florida
Warrington College of Business
Debt and Money Markets
Professor: Jongsub Lee
Exercises for Bond Pricing, Yield-to-Maturity, and Rate of Return
A debt of $25,000 is to be amortized over 7 years at 7% interest
FIN 4243 Practice Midterm Fall 2009 Solution
Part I. Multiple Choice (Total 50 pts or 2 pts each) 1. The current price of a bond is 102.50. If interest rates change by 0.5%, the value of the bond price changes by 2.50. What is the duration of the bond? A.
FIN 4243 Practice Midterm Fall 2009 Due on 10/5/2009
Name: UFID: Useful Formula Time Value of Money Future Value Single CF Present Value
Bond Pricing Formula Coupon Bond Zero-coupon Bond Measuring Yields Annualizing Yields EAY: effect
FIN 4243 Fall 2009 Midterm Solution (Version A)
Name: UFID: Section (circle one): 3027 or 3038
DO NOT BEGIN UNTIL YOU ARE TOLD TO DO SO.
Part I. Multiple Choice. 2.5 points per question. (Total 50 pts) 1. An investor paid a full price of $1059.04 each f
Points in time
Enter into contract
Short delivers commodity
and receives payment.
Long receives commodity
and makes payment.
Points in time
Enter into contra
Find the prices of the following Treasury bills per dollar of par:
(a) 40 days, discount rate of 6 percent
(b) 90 days, discount rate of 12 percent
(c) 80 days, discount rate of 8 percent
(d) 92 days, discount rate of 7 percent.
Suppose an initially flat term structure with all interest rates equal to 6 percent. Compute
the price change for a one-year par bond if the interest rate increases by 2 percent. Then
compute the price change on a perpetual par bond if the in
Business Cycle Patterns for
the Term Structure
The most common yield curve shape is
Declining yield curves occur when
interest rates are histor
The Risk of Changing
Short Horizon Investors
P1, the price at Time 1, is important.
Long Horizon Investors
C + PAR
Value at some distant date n is impor
A call option with exercise price of $90 sells for $8. The call option has three months
until expiration. The underlying asset sells for $90. A put with the same exercise price
sells for $6.
(a) Draw a profit profile for buying the call opti
Assume that the inflation-free rate of interest is 3 percent and that the inflation rate is 10
percent with complete certainty and no taxes. Determine the nominal interest rate.
i = nominal rate
r = inflation-free rate
p = inflation rate
A one-period strip has a price of $86 and par value of $100. A two-period strip has a
price of $88 and par value of $100. Show the arbitrage opportunity.
A two-period bond ha
FIN 4243 -FALL 2014
Tentative Course Outline
Professor Miles Livingston
Office Hours: TU, TH Period 2
M, W Period 4
Assume a yield to maturity of 8 percent. Compute the duration
for the following bonds. Assume $100 par values. For the 12%
coupon bond, compute the duration using the two duration
formulas. Which formula is easiest to compute?
(a) 10 years, z
The open interest includes:
Bill 10 contracts
Helen 10 contracts
Determine the new open interest under the following assumptions:
(a) Bill goes long 1 contract and Gene shorts 1 contract.
For a standard fixed-rate mortgage, compute the annual mortgage payment for a 15-year
annual mortgage loan with principal of $100 and interest rate of 10 percent.
P = 100
N = 15; I/YR = 10; PMT = 1; PV = PVA = ?
PVA = 7.6061
A bond futures contract with one deliverable bond has a maturity date in 2 years from now
have, par value of $100, and annual coupon of $8. If the futures delivery date is in 1 year,
determine the futures price if
(a) R0,1 = R0,2 = 8 percent
DETERMINANTS OF INTEREST
Loanable Funds Approach
Demand = Supply
The Demand for Funds
Business investment the sum total of
investment opportuniBes for all businesses in
Treasury Bond Futures
at least 15 years
Cheapest to Deliver
There are many deliverable bonds.
This prevents anyone from buying up
all the deliverable bonds (cornering the
Forward Rate Agreements
Rate Agreement (FRA)
FRAs and Swaps
Tuckman, Chapter 17
Forward Rate Agreement
rate agreement (FRA) is a
contract between 2 counterparties to
exchange a fixed interest p