UNIT 6 Practice Problem Set  ANSWERS 1)Asset Stock A Stock B Riskfree 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:
Honor Code:
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, YieldtoMaturity, and Rate of Return
Solutions
1) Amortization
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
Multiple CFs
Annuity
Bond Pricing Formula Coupon Bond Zerocoupon 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.
1
Part I. Multiple Choice. 2.5 points per question. (Total 50 pts) 1. An investor paid a full price of $1059.04 each f
Chapter 14
Futures Contracts
141
Futures Contracts
Points in time
Now
0
Enter into contract
Delivery date
Short delivers commodity
and receives payment.
Long receives commodity
and makes payment.
142
Silver Futures
Points in time
Now
0
Enter into contra
CHAPTER 5
3.
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.
Discount rat
CHAPTER 9
5.
Suppose an initially flat term structure with all interest rates equal to 6 percent. Compute
the price change for a oneyear par bond if the interest rate increases by 2 percent. Then
compute the price change on a perpetual par bond if the in
Chapter 9
Term Structure
of Interest
Rates
91
Business Cycle Patterns for
the Term Structure
Yield
Declining
Rising
Maturity
92
Yield Curves
The most common yield curve shape is
upwardsloping.
Declining yield curves occur when
interest rates are histor
Chapter 6
The Risk of Changing
Interest Rates
61
Short Horizon Investors
0
1
Maturity
n
Time
P0
P1
y0
y1
P1, the price at Time 1, is important.
62
Long Horizon Investors
0
1
2
Maturity
n
Time
P0
C
C
C + PAR
Reinvest
Value at some distant date n is impor
Chapter 11
1.
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
CHAPTER 1
3.
Assume that the inflationfree 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 = inflationfree rate
p = inflation rate
i =
CHAPTER 8
1.
A oneperiod strip has a price of $86 and par value of $100. A twoperiod strip has a
price of $88 and par value of $100. Show the arbitrage opportunity.
Long
Short
Net
Cum Net
2.
1

+100
+2
+2
+100
+102
2

100
100
+2
A twoperiod bond ha
FIN 4243 FALL 2014
Tentative Course Outline
MondayWednesday Class
Professor Miles Livingston
Stuzin 315D
Telephone: 3523924316
Office Hours: TU, TH Period 2
M, W Period 4
Email: miles.livingston@warrington.ufl.edu
Homepage: http:/bear.warrington.ufl.e
CHAPTER 6
1.
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
BondPricing:
FlatTermStructure
Instructor:JongsubLee
InterestRatesforDifferentMaturities
n
Interestratesfordifferentmaturitiesareingeneraldifferent
n
Forexample,interestratethatweusetodiscountafuturecash
flowin1yearisdifferentfromthatweusefor2yearcashflow
CHAPTER 14
1.
The open interest includes:
Longs
Bob
Lois
15 contracts
5 contracts
Shorts
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.
(b) Bi
CHAPTER 13
1.
For a standard fixedrate mortgage, compute the annual mortgage payment for a 15year
annual mortgage loan with principal of $100 and interest rate of 10 percent.
M=
P
P = 100
PVA n
N = 15; I/YR = 10; PMT = 1; PV = PVA = ?
PVA = 7.6061
M=
2.
CHAPTER 15
1.
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
RATES
Loanable Funds Approach
Interest rates
Demand
Supply
i
Demand = Supply
Loanable
funds
The Demand for Funds
Business investment the sum total of
investment opportuniBes for all businesses in
th
Chapter 15
Bond Futures
151
Treasury Bond Futures
0
Delivery date
n
at least 15 years
$100,000 par
per contract
152
Cheapest to Deliver
There are many deliverable bonds.
This prevents anyone from buying up
all the deliverable bonds (cornering the
market
ClassIntro
Instructor:JongsubLee
MeetingAgenda
n
Syllabus&ClassSurvey
n
Preliminaries
n
n
n
n
CompoundingandDiscounting
NetPresentValue
InternalRateofReturn
LawofOnePriceandNoArbitrage
FromYourPreviousCoursework
n
CashFlows
n
Asequenceofmoneyflows
n
n
n
T
BondPricingwith
GeneralTermStructure
Instructor:JongsubLee
TheYieldCurve
n
Yieldtomaturityofabondisdeterminedbygeneral
fixedincomemarketcondition
n
n
Duetomarketinvestorsyieldseekingbehavior,yieldsof
variousbondstendtomovetogether
Yieldsdependonmaturities
Forward Rate Agreements
Concepts
Forward
Rate Agreement (FRA)
Forward Contract
Valuation
FRAs and Swaps
Reading
Tuckman, Chapter 17
Forward Rate Agreement
A forward
rate agreement (FRA) is a
contract between 2 counterparties to
exchange a fixed interest p