1.) Suppose the current risk-free rate of interest is 5%

What is the no-arbitrage price of a financial security that pays certain cash flows of 3,150 in one year and 2,205 in two years' time?

What will be the price of this security one year from now, immediately after the first cash flow is paid?

2.) You have the opportunity to invest 1,000 today in exchange for $50 each year forever, starting one year from today.

If the interest rate is 4%, what is the NPV of this investment opportunity?

At what interest rate would you be just indifferent between making this investment and not?

3.) Your firm is purchasing a new piece of equipment. Your supplier offers two payment options: you can pay $850 today or $900 in one year. If you can borrow and invest at your bank at an interest rate of 5% which option would you prefer? (Show your work)

4.) You plan to retire 30 years from now. Suppose you save 10,000 per year for the next 30 years for retirement. Assume the first contribution is made one year from today and you anticipate a 7% annual return on your investment.

How much money will you have in your account at the end of the 30th year when you retire?

Suppose you plan to live forever and you want your retirement income to grow with inflation, which you estimate to be 3% per year. If you continue to earn 7% on your investment, how much can you withdraw for your retirement income in your first year of retirement?

5.) Your bank offers a savings account with an 8% interest rate, stated as an APR with monthly compounding. If you invest $1,000 today, how much money will be in your account at the end of one year?

6.) You observe the following prices today of treasury zero-coupon bonds of different maturities. Each bond has a face value of $100:

Maturity Price

6 months $99.00

1 year $97.50

2 years $94.00

Based on these bond prices, fill in the current Treasury yield curve below. Express each YTM as an effective annual rate (EAR). (round to two decimal places

Maturity	6 Months	1 Year	2 Years
Yield

Express the 6-month rate as an APR (based on semi-annual compounding)

7.) Suppose you observe the following Treasury yield curve today:

Maturity:	6 Months	1 Year	2 Years
Yield:	1.0%	1.2%	1.5%

What do investors expect the 1-year rate to be one year from today?

8.) Consider the following two bonds:

	Bond A	Bond B
Maturity	10 Years	15 Years
Coupon	5%	5%
Face Value	$1,000	$1,000

If the YTM of Bond A is 6% the price will be:

a. Above par

b. At par

c. Below par

If interest rates change by 1% the price of Bond A will:

a. Change by more than the price of Bond B

b. Change by less that the price of Bond B

c. Change by the same amount as the price of Bond B

d. Remain unchanged

Suppose that 9 years and 11 months from now, the YTM (on both bonds) is 7%. Which bond should have the higher price at that pint in time?

a. Bond A

b. Bond B

c. Both bonds will have the same price

Suppose investors perceive that the default risk of Bond B has increased. The expected return on Bond B will now be

a. Higher that its Yield to Maturity

b. Lower than its Yield to Maturity

c. Equal to its Yield to Maturity

9.) Today is January 1, 2017. A bond with the following characteristics has just been issued:

Face Value	$100
Coupon Rate	6%
Maturity	2 Years

assuming coupons are paid semi-annually, fill in the date and dollar amount of each of the promised cash flows of the bond (note: you may not need all of the rows):

Date	Promised Cash Flow

If the YTM is 4% stated as an APR, what is the current price of the bond? (You do not need to calculate if you write down the exact formula with all the correct inputs included)

10.) You just took out a 15-year mortgage to purchase a home. The initial loan balance is $500,000 and the interest rate is 6% (APR with monthly compounding).

What is your monthly payment?

How much total interest will you pay over the first year of the mortgage?