FINE451/FINE630 Fall 2013
Assignment 2
1. This problem is to be solved in Excel. In the le a_02_data.xls you are given the quarterly series of
continuously compounded CAD spot rates computed by the Ba
FINE451/FINE630 Fall 2013
Problem Set 3
1. Convexity adjustment. Consider the exchange rate between USD and CAD. Assume that the amount
in CAD you need to pay to get 1 USD is currently equal to 1. Nex
FINE451/FINE630 Fall 2013
Problem Set 3 answers
1. We have:
0:4
1:276 + 0:6
1
0:849
1
+ 0:6
1:276
1:02 and 0:4
0:849
1:02:
In other words the expected amount in CAD required to get 1 USD and the expec
FINE451/FINE630 Fall 2013
Problem Set 4
1. Pricing on a tree. Assume: continuous compounding,
0:4; q (u) = 0:5:
d
u
= 1; r0 = 3%; r1 = 5%; r1 = 2%; p (u) =
2
(a) Compute the 2y spot rate at date 0 r0
Lecture 8
Demand and supply
No-arbitrage
Question: You would like to initiate a new swap with notional 10M, need
to find the swap rate
Answer: By no-arbitrage swap value = the difference between the p
Dividend & Other
Payouts
Saif Ullah
Theory of Firm II
Types of Dividend
Regular Cash Dividends: Most firms pay regular cash
dividends four times a year
Stock Dividend: No cash is given. Shares are giv
Issuing Equity
Securities to the Public
Saif Ullah
Theory of Firm II
Requirements for Public Issue
Provincial Bodies in Canada
Securities and Exchange Commission in USA
Registration Statement and Pros
Limits to the Use of Debt
Theory of Firm II
Saif Ullah
Bankruptcy Risk and Bankruptcy
Cost
Economic vs. Legal Bankruptcy
Risk of Bankruptcy and Cost of Bankruptcy
Risk Neutrality
Bankruptcy costs lowe
Capital Structure
Theory of Firm II
Saif Ullah
Value of the Firm
S
SB
V=B +S
Financial Leverage and Firm Value
Trans Can Corporation
Currently No Debt
Number of Shares Outstanding is 400, Price per
Valuations and Capital Budgeting for
the Levered Firm
Chapter 18
Why?
We assumed that Firm is an All-Equity Firm (Ch7-9)
Levered Firm has Lower Cost of Capital
Changes NPV
Projects Rejected by Unlever
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
9.1 a.
To calculate the accounting breakeven, we first need to find the depreciation for each year. The depreciation is:
Depreciation = $7
Time Value of Money
Theory of Firm II
Saif Ullah
1
The Time Value of Money
Money NOW is worth more than money LATER!
Why?
Dollar received today can be invested to earn interest
The amount of interest
Corporate Financing
Decision & Efficient
Capital Markets
Theory of Firm II
Saif Ullah
Financing Decisions
Issue Debt or Issue Equity?
When and how much?
Pay Dividends, Buy Back Shares?
Financing D
Risk Analysis, Real Options
and Capital Budgeting
Chapter 9
FINA 395
Decision Tree
There is usually a sequence of decisions in NPV project
analysis.
Decision trees are used to identify the sequential
Lecture6
Continuoustimemodels
Afewnotesoncontinuoustime
Our reference period is infinitesimal, of length dt
we model d : the changes in over infinitely small periods of length dt
is annualised, but ap
Lecture2
Basicsof
fixedincomeanalysis
Noarbitrage
Many different fixed income securities: Treasury notes, STRIPS, swaps
In this course we will price those securities in a way that will rule out the
po
FINE451/FINE630 Fall 2013
Assignment 2 answers
1. (a) See Excel le.
(b) See Excel le. Both the level and the slope of the term structure change, inconsistent with the
assumption of parallel shifts
(c)
FINE451/FINE630 Fall 2013
Assignment 1
1. This problem is to be solved in Excel/Matlab. Assume semi-annual compounding. On 31/08/2013
you are given the following information about bonds with dierent m
FINE451/FINE630 Fall 2013
Assignment 3
1. This problem is to be solved in Excel. In the le a_03_data.xls you are given the weekly series of
continuously compounded instantaneous short rate and the pri
FINE451/FINE630 Fall 2013
Assignment 4
This problem is to be solved in Excel. In the le a_04_data.xls you are given ZCB prices for dierent
maturities.
1. Assuming constant volatility for all maturitie
FINE451/FINE630 Fall 2013
Problem Set 2
1. Duration.
(a) Consider two 3y bonds, one paying annual coupons equal to 3, the other annual coupons equal to 5.
Without calculations, which bond has higher d