Sauder School of Business
COMM 371
Practice Homework Problem Set 9 - Solutions and Answers
1. (a) Payo diagram:
Buttery Spread
Payo
0
ST
X-a X X+a
As the low and high strike price converge to the intermediate price, i.e., as a gets
closer to 0, the payos
Sauder School of Business
COMM 371
Practice Homework Problem Set 9
1. A buttery spread is a combination of option positions that involve three strike prices.
To create a buttery spread, a trader purchases an option with a low strike price and
an option wi
Sauder School of Business
Prof. Howard Kung
COMM 371
Problem Set 3
1. Assume that spot rates are as follows:
Maturity Spot Rate
1 year
5%
2 years
5.5%
3 years
6%
4 years
6.3%
Compute the prices and YTMs of the following bonds:
(a) A zero-coupon bond with
Sauder School of Business
Georgios Skoulakis
COMM 371
Practice Homework Problem Set 3
1. Assume that spot rates are as follows:
Maturity Spot Rate
1 year
5%
2 years
5.5%
3 years
6%
4 years
6.3%
Compute the prices and YTMs of the following bonds:
(a) A zer
Sauder School of Business
Georgios Skoulakis
COMM 371
Practice Homework Problem Set 2
1. You can invest $10,000 in a certicate of deposit (CD) oered by your bank. The CD
is for 3 years and the bank quotes you a rate of 5%. How much will you have in 3 year
Sauder School of Business
Prof. Howard Kung
COMM 371
Problem Set 9
1. A buttery spread is a combination of option positions that involve three strike prices.
To create a buttery spread, a trader purchases an option with a low strike price and
an option wi
Sauder School of Business
Elena Pikulina
COMM 371
Problem Set 5
1. The stock of FM430.com is trading at $25 today. Exactly one year ago, the stock was
trading at $32.50.
(a) Compute the realized return on holding FM430.com over the past year. Assume
that
Sauder School of Business
Georgios Skoulakis
COMM 371
Practice Homework Problem Set 3 - Solution
1. (a) The price is
100
= 83.96.
(1 + 6%)3
The YTM is obviously 6%.
(b) The price is
105
5
+
= 99.10.
1 + 5% (1 + 5.5%)2
The YTM is given by
99.10 =
105
5
+
.
Sauder School of Business
Georgios Skoulakis
COMM 371
Practice Homework Problem Set 2 - Solution
1. (a) If the 5% is an EAR, you will have
$10, 000 (1 + 5%)3 = $11, 576.25.
(b) If the 5% is a quarterly APR, the quarterly rate is
5%
= 1.25%.
4
In 3 years,
Sauder School of Business
COMM 371
Practice Homework Problem Set 4 - Solutions and Answers
1.
Y T M1 =
100
96.62
Y T M2 =
100
92.45
Y T M3 =
100
87.63
Y T M4 =
100
83.06
1 = 3.50%
1
2
1 = 4.00%
1
3
1 = 4.50%
1
4
1 = 4.75%
2. 10% coupon bond
P = 10
1
Sauder School of Business
Prof. Georgios Skoulakis
COMM 371
Practice Homework Problem Set 1
1. Getting Familiar with Excel
In this problem you will use le COMM371_Practice_HW_Problem_Set_1.xls. It
contains daily market data for GS stock and the S&P 500 in
COURSE:
COMM 371
SECTION:
ASSIGNMENT:MARKED HOMEWORK 2
GROUP MEMBER INFORMATION
LAST NAME
FIRST NAME
UID
Date
TLT Price
IWM Price
1-Aug-02
3-Sep-02
1-Oct-02
1-Nov-02
2-Dec-02
2-Jan-03
3-Feb-03
3-Mar-03
1-Apr-03
1-May-03
2-Jun-03
1-Jul-03
1-Aug-03
2-Sep-03
Sauder School of Business
COMM 371
Marked Homework 2
This homework can be done in groups of 2-5 and it has to be typed.
Submit a hard copy (with detailed explanations) in person and an Excel le (so that
your calculations can be checked) on Connect.
The
Sauder School of Business
COMM 371
Marked Problem Set 1
Solutions must be typed. The work has to be done in groups of up to 5 students (include
the name of each group member, along with the university ID, at the top of the document).
Only one copy per gro
Sauder School of Business
COMM 371
Marked Problem Set 1 - Solutions and Answers
1. (a) The PV of the future stock dividends is
8 1.10 8 1.102 8 1.103 8 1.104
1
8 1.104 1.05
+
,
+
+
+
1.08
1.082
1.083
1.084
1.084
0.08 0.05
where
8 1.104 1.05
= $409.95
0.08
Investment Theory
Valuation of Fixed-Income Securities I
Charles Martineau
Sauder School of Business
University of British Columbia
.
1 / 60
Overview of the Lecture
1
Denition and Overview of Fixed-Income Securities
2
Fixed-Income Terminology
3
Term Struc
Sauder School of Business
Finance Division
COMM 371
Prof. Howard Kung
Problem Set 9 - Solution Notes
1. (a) Payo diagram:
Buttery Spread
Payo
ST
0
X-a X X+a
As the low and high strike price converge to the intermediate price, i.e., as a gets
closer to 0,
Investment Theory
The Capital Asset Pricing Model
Charles Martineau
Sauder School of Business
University of British Columbia
1/1
General Overview
In the previous lecture (Portfolio Theory) we studied how to choose a
stock portfolio.
A crucial input was
Investment Theory
Valuation of Fixed-Income Securities II
Charles Martineau
Sauder School of Business
University of British Columbia
1/1
Overview of the Lecture
1
Interest Rate Movements and Bond Prices
2
Performance Prole
3
Duration
4
Convexity
5
Managin
Investment Theory
Empirical Facts on Stock Returns
Charles Martineau
Sauder School of Business
University of British Columbia
General Overview
In Lectures 3 and 4 (Fixed-Income Securities I and II) we studied bonds.
Now we turn to stocks.
Lecture 5 (Empi
Sauder School of Business
COMM 371
Practice Homework Problem Set 8
1. Suppose that in 3 months the cost of a pound of Colombian coee will be either $1.25
or $2.25. The current price is $1.75 per pound.
(a) What are the risks faced by a hotel chain who is
Sauder School of Business
COMM 371
Practice Homework Problem Set 7
1. Security B has a price of $35 and a beta of 1.4. The risk-free rate is 5% and the market
risk premium is 6%.
(a) According to the CAPM, what return do investors expect on the security?
Sauder School of Business
COMM 371
Practice Homework Problem Set 8 - Solutions and Answers
1. (a) On one hand, the hotel chain faces the risk that the price at which it purchases
coee will rise. On the other hand, the hotel chain can pass along these cost
Sauder School of Business
COMM 371
Practice Homework Problem Set 7 - Solutions and Answers
1. (a) According to the CAPM, investors expect a return on security B of
E[RB ] = 5% + 1.4 6% = 13.4%.
(b) The expected return on security B is given by
E[RB ] =
E[
Sauder School of Business
COMM 371
Georgios Skoulakis
Practice Homework Problem Set 6
1. Which of the following statements is correct? Give a brief but precise explanation.
(a) Proper diversication can always eliminate systematic risk.
(b) Proper diversic