Questions 1-12 require SHORT answers. Do not do a ?data dump? of information hoping the correct answer is buried within. Points will be deducted for incorrect and non-relevant points contained in your responses.

Problem Set 1 covering Modules 1 & 2 Each question is worth 5 points. Please type your response after each question. If you hand-wrote any part of the exam, please scan the entire exam in pdf format and email to the professor. Questions 1-12 require SHORT answers. Do not do a \"data dump\" of information hoping the correct answer is buried within. Points will be deducted for incorrect and non-relevant points contained in your responses. 1. State whether the following is a real or financial asset: patent, foreign exchange forward contract, certificate of deposit, computer 2. What does it mean that there is \"no free lunch\" in investing? 3. If markets are efficient then what does this say about the expected value of active management over time when it comes to security selection? Why? 4. i) Give two examples of a financial intermediary used by households. ii) How do these financial intermediaries help households achieve their financial goals? 5. i) What do credit spreads reflect? ii) What would you expect to happen to the credit spread of BBB+ rated corporate debt if the economy were to experience a stronger-than-expected economic recovery and why? 6. You see an advertisement for a book that claims to show you a sure way to make money in the stock market with little or no risk. Would you buy the book and why or why not? 7. Since 1926 the average return of large capitalization stocks (a risky investment) has outpaced that of Treasury bills (a riskless, highly liquid investment) by about 7% per year. In light of these higher returns, why, would anyone invest in Treasury bills vs. stocks? 8. A \"proprietary trader\" working for a bank on \"Wall Street\" is someone who invests the Bank's capital in order to boost profits. Banks have traditionally compensated their traders with a share of the trading profits they generate. i) How might this practice affect a trader's willingness to assume risk? ii) What is the agency problem this practice has engendered? 9. In what ways is preferred stock like debt and in what ways is it like equity? Provide two characteristics similar to debt and three characteristics similar to equity. 10. What is the key difference between a call option and a futures contract? 11. Municipal bonds are tax free. Why would investors in a high tax bracket be more inclined to invest in municipal bonds than investors in a low tax bracket? 12. What is a capitalization weighted index? Is the Dow Jones Industrial Average an example of such an index? If not, what kind of index is it? List three examples of a capitalization weighted index. 13. Assume short-term municipal bonds currently offer yields of 4% while comparable taxable bonds pay 5%. For each marginal tax bracket below, Which gives you the higher after tax yield if your tax bracket is: a. zero; b. 10%; c. 20%; d. 30%; 14. i) Which of the four options below is the riskiest investment in terms of exposing the investor to the highest possible loss? a. writing or short a call option b. writing or short a put option c. buying or long a call option d. buying or long a put option ii) Draw the payoff diagram of the option that corresponds to the correct answer above. 15. You place a stop-sell order to sell 1000 shares of stock at $60 when the current price is $72. How much will you receive for each share if the price drops to $50? a) $50 b) $60 c) less than $59.95 but more than 50 d) can't tell from information given 16. Would a portfolio manager of an actively managed stock mutual fund believe that markets are efficient? Why or why not? 17. Competing banks offer the same 7% annual yield on a 5-year CD. Bank A's CD offers annual compounding; while Bank B's CD offers monthly compounding. If you're looking to invest $10,000, which bank's CD do you select and why? 18. You are bullish on FaceBook (FB). The current price is $50/share and you have $5,000 of your own to invest. You then borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest a total of $10,000 in the stock. The stock does not pay a dividend. a. What is the return on your investment if the price of FB stock rises by 10% during the next year? b. What is the return on your investment if the price of FB falls by 10% during the next year? c. Discuss the impact of margining on your return. 19. You are to receive $500 at the end of one year; $250 at the end of two years; $300 at the end of three years. If the interest rate is 5%, what is the present value of these cash flows? 20. Assuming the cash flows above, what is the future value of these flows at the end of year 4