(2 Points) If The Present Value of The Cash Flow X Is - $400, and The Present Value

1.
(2 points) If the present value of the cash flow X is -$400, and the present value
cash flow Y $1050, and if the duration of cash flow stream X is 5 years, and the
duration of cash flow stream Y is 7 years, then the present value of the combined
cash flow is:
a. $650
b. -$150
c. -$50
d. $150
e. I need more data
Mark the correct answer above and please show me why in the space between two lines below.
2. (2 points) You would like to have enough money saved to receive a $50,000 per
year forever after retirement so that you and your family can lead a good life. How
much would you need to save in your retirement fund to achieve this goal? Assume
that the perpetuity payments start one year from the date of your retirement. The
interest rate is 1% nominal annual with annual compounding?
a. $5,000,000
b. $50,000
c. $500,000
d. None of the above
3. Current spot rates expressed in percent as nominal annual with annual
compounding are given in the following table:
Date 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 10 Yr 20 Yr
Today 0.41% 0.54% 0.64 0.85% 1.15% 1.43% 1.89% 2.26% 2.47% 2.87% 3.16%
You are a CFO of Siemens and would like to sign a contract today to borrow money
in three years from now for seven years.
a) (3 points) What interest rate do you expect that you will have to pay for this
loan?
b) (3 points) What if the percentages in the table were expressed as nominal
annual with continuous compounding?
Please provide your answer in the space marked bellow
a)
b)
4. (3 points) John House has taken a $250,000 mortgage on his house at an interest
rate of 6% per year. If the mortgage calls for twenty equal annual payments, what is
the amount of each payment?  
a. $21,796.14 
b. $10,500.00
c. $16,882.43
5. A US government bond with a face value of $1,500 has a coupon rate of 2% with
semiannual coupons, and matures in 2 years and six months from now. The first
coupon is due in six months from now.
You have obtained the following rates from the web site of the US Treasury. The
rates are expressed as nominal annual rates with semiannual compounding as usual.
Date 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 10 Yr 20 Yr
Today 0.41% 0.54% 0.64 0.85% 1.15% 1.43% 1.89% 2.26% 2.47% 2.87% 3.16%
If some rates are missing for some maturities use the averages. E.g for the 1.5 year
maturity use the average of 1 and 2 year maturity.
a. (2 points) Draw the diagram representation of the cash flow stream offered by
this bond.
b. (4 points) What is the present value of the first 4 coupons?
c. (3 points) What is the present value of the payment that this bond gives at the
date of its maturity? (e.g. the last payment that this bond gives)
d. (2 points) Estimate the market price of this bond.

6. If you invest $1000 today (Year0) into AAA project you are offered the following
cash flow stream:
Year1: $100
Year2: $50
Year3: $0
Year4: $30
Year5: $30
Yera6: $30
.
$30 each year
.
.
Year13: $30
Year14: $1000
Year15: $900
.
.
And then continues to pay 10% less till eternity.
Opportunity cost of capital is 5% nominal annual with annual compounding.
a) (2 points) Draw the diagram representation of the whole cash flow stream
(including the investment).
b) (2 points) What is the present value of the first three years of the project
excluding the initial investment? (e.g. what is the present value of the cash flows
received in year1, in year2 and year3)
c) (4 points) What is the present value of the 10 cash flows received in years from
year 4 till the year 13 (both year 4 and year 13 included)?
d) (3 points) What is the present value of the cash flows received from year 14 till
eternity, including the cash flow received in year 14?
e) (2 points) What is the total net present value of the project AAA (including the
initial investment)?
7. The real rate of interest is 14% per year and the inflation is 6% per year (both
expressed with annual compounding.
a) (2 point) What is the nominal rate of interest expressed as nominal annual with
annual compunding?
b) (2 points) How much would that nominal rate be if expressed with continuous
compounding?
a)
b)
________________________________________________________________________
8. You observe the following three stocks
Apple Microsoft Google
Value of the $613.6 $479 $553.9
firm Billion Billion Billion
Expected 17% 19% 25%
return
Standard 15% 22% 18%
deviation of
returns
Correlation coefficient between the returns 0.3

of Apple and returns Microsoft
of Apple and the returns of Google
of Microsoft and the returns Google
a. (3 points) How much of your money in % of your total investment you need to
invest into each of these three stocks to make your portfolio value weighted.
b. (3 points) What is the expected return of this value weighted portfolio?

c. (6 points) What is the standard deviation of this value weighted portfolio?
d. (2 points) Given what you have calculated (the expected return and the standard
deviation) of this value weighted portfolio, would you rather invest into this
portfolio, or maybe some of the particular stocks (Apple, Microsoft or Google) offers
better risk-return combination?
9. (2 points) Stock A offers an expected return of 10% and stock B offers an
expected rate of return of 12%. If the standard deviation of A is 21% and B is 20%,
beta of company A is 0.5 and beta of company B is 1.05 then a well-diversified
investor would:
a. Prefer A to B
b. Prefer B to A
c. Indifferent
c. Cannot answer without additional data
10. (3 points) If the market risk premium (rm - rf) is 6%, then according to the
CAPM, the risk premium of a stock with beta value of 0.7 must be:
a. Less than 4%
b. 4.2%
c. Greater than 4%
d. Cannot be determined
11. (4 points) Safro Corporation has had returns of -1%, 1% and 0.5% for the past
three years. Calculate the standard deviation of the returns.
a. 0.85%
b. 1.04%
c. 8.5%
12. You would like to invest 50.000 € which you have received from your
grandparents after your graduation. You have two different companies in which you
can invest. You consider 3 different possibilities to distribute your money.
1. You can invest in shares of company A only. If the economy remains stable shares
of company A will generate 20% return. If things go very well 30%, while in times of
crisis shares will lose -45%.
2. You can invest in shares of company B only, leading to most likely return of 5% in
normal times, 10% in good times and -5% in bad times.
3. Or, you can invest 50% in each share.
a) (6 points) Please construct the outcome matrix bellow:
b) (4 points) How would you invest according to the Maximin rule?:

c) (4 points) How would you invest according to the Hurwicz principle if alpha=0.5:
d) (4 points) How would you invest according to the Laplace rule:

e) (8 points) Now, together with your banking advisor, you establish the opinion
that it is 50% probable that markets remain stable. And with 25% probability, we
slide in either a boom or a recession. How would invest if you were to maximize
your expected utility. Your utility function is given by 𝑈𝑈(𝑒𝑒𝑖𝑖 ) = �𝑒𝑒𝑖𝑖 .

(2 Points) If The Present Value of The Cash Flow X Is - $400, and The Present Value

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(2 Points) If The Present Value of The Cash Flow X Is - $400, and The Present Value

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Please provide your answer in the space marked bellow

d. (2 points) Estimate the market price of this bond.

Opportunity cost of capital is 5% nominal annual with annual compounding.

Correlation coefficient between the returns 0.3

b. (3 points) What is the expected return of this value weighted portfolio?

a) (6 points) Please construct the outcome matrix bellow:

b) (4 points) How would you invest according to the Maximin rule?:

d) (4 points) How would you invest according to the Laplace rule:

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