1. To what value would an investment of 2000 grow in five years if the return was 11% annually? 2. 1 3. What return is required (IRR) for 2000 to grow to 3000 in five years. Solve for i. 4. What price would you be willing to pay for a bond with 100 annual coupon and that sells for 800 at the end of five years 5. Options: A Euro option costs $0.005 per Euro and gives the right to sell Euro for $1.10 (strike price). Each standard contract unit is 70000 Euro. a. Is this a call or a put option? b. Would you exercise the option if the Spot rate is 1.08 ? what would be your net gain or loss? c. Would you exercise the option if the spot price is 1.13 ? What would be your 9. Compare the liquidity premium and the expectation hypothesis in their explanations of investor behavior. Which of the two is more successful in explaining that behavior? 10. Graph a normal Yield Curve. Grapt an inverted Yield Curve. Why has it been inverted recently? What does it signal about the future? 11. What theory may imply that financial analysts can not make any extraordinary market gains? 12. Here are the three observations we made about Bond yields when we discussed Market expectations: Finish the second and third statement a. Bonds of different maturities are highly correlated. go up and down together. b. Shorter term bonds yields c. Which term bonds fluctuate more 6. Risk: Assume the following next year stock market scenarios - probabilities and returns a. Compute the expected return in percent. b. Compute the expected value of $1000 investment next year c. Compute the Standard deviation d. If the risk free rate is .05 , what is the risk premium 7. Compute the price of a share of stock that pays a dividend of $5 per ear, assuming that you will sell it for $50 after two years and you require 10% return. 4. What price would you be willing to pay for a bond with 100 annual coupon and that sells for 800 at the end of five years 5. Options: A Euro option costs $0.005 per Euro and gives the right to sell Euro for $1.10 (strike price). Each standard contract unit is 70000 Euro. a. Is this a call or a put option? b. Would you exercise the option if the Spot rate is 1.08 ? what would be your net gain or loss? c. Would you exercise the option if the spot price is 1.13 ? What would be your net loss or gain? d. What do we mean by "market risk" in this Euro Option? 7. Compute the price of a share of stock that pays a dividend of $5 per ear, assuming that you will sell it for $50 after two years and you require 10% return. 8. Bond Pricing: a. What price would you be willing to pay for a bond with $120 annual coupon and that sells for 900 at the end of five years b. What is the current yield for that bond
