Escolar Documentos
Profissional Documentos
Cultura Documentos
Spring 2018
Problem Set 1
Due at the beginning of class on 1/24/2018
IMPORTANT: Be sure to show your work or explain the inputs you used in Excel, in order
to receive partial credit.
1. As winner of the Midas Touch Prime Lottery, you can choose one of the following
prizes:
If the term structure of interest rates is flat at 4%, which is the most valuable prize?
2. The three U.S. Treasury bonds described below are traded in the market and pay
annual coupons. Assume that the par amount for each bond is $100.
Assume that the 1-year interest rate is 3%, the 2-year interest rate is 4%, and the
3-year interest rate is 5%.
(a) Write out each bond’s cash flow for each year.
(b) Find each bond’s price.
(c) Suppose the Treasury plans to issue a new 3-year note with a $1,000 face value
and annual coupons. What coupon rate would they need to set for the bond to
initially trade at a price of $1,000?
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3. Consider the following three stocks:
If the discount rate for each stock is 10 percent, what is the price of each stock?
4. You are looking to figure out what a company’s stock price should be. It is expected
to pay a dividend of $10 per share next year, and grow that dividend at a rate of 2%
each year after that. The financial analyst that you hired crunched some numbers, and
is confident that the beta of the stock is 0.8. The current risk-free interest rate is 1%,
and the market return is 10%.