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# Pure Expectations Theory Essay

773 words - 4 pages

FIN 402 FALL 2012 ANSWERS - HOMEWORK #1 1. (Q2) a. financial b. financial c. real d. real e. real f. financial g. real h. financial a. PV = \$100/1.0110 = \$90.53 b. PV = \$100/1.1310 = \$29.46 c. PV = \$100/1.2515 = \$3.52 d. PV = \$100/1.12 + \$100/1.122 + \$100/1.123 = \$240.18 a. You can use annuity formula or Excel: PV of bond = PV of coupons + PV of principal PV of coupons = \$275/0.026 * (1 – (1/1.026^20)) = \$4,246.80 PV of principal = \$10000/1.026^20 = \$5,984.84 PV of bond = \$4,246.80 + \$5,984.84 = \$10,231.64 b. Need to use Excel: =\$10000/(1+(r/2))^20 + PV((r/2),20,-275) for 0.01 3 × Price of A + 1.5 × Price of B = 10 × Price of C 3 × \$4 + \$1.5 × \$10 = X X = \$27 If price is \$25 ( For example, you can buy 10 shares of Asset C, then sell 30 shares of A and 15 shares of B. Get \$270, Pay \$250, and make \$20 in risk-free profits. Asset A Asset B Asset C TOTAL Today \$4 × 30 = \$120 \$10 × ...view middle of the document...

50/gallon = \$175 2083 city miles / 20 mpg => 104.15 gallons * \$3.50/gallon = \$364.53 Total Monthly Fuel Cost = \$539.53

Monthly opportunity cost of capital is 2%/12 = 0.1667% Total PV of Costs = \$32,845 + Annuity of \$539.53 for 36 months at 0.1667% = \$41,356.38 Highlander Hybrid: 1250 hw miles / 28 mpg => 44.64 gallons * \$3.50/gallon = \$156.25 2083 city miles / 28 mpg => 74.39 gallons * \$3.50/gallon = \$260.38 Total Monthly Fuel Cost = \$416.63 Monthly opportunity cost of capital is 2%/12 = 0.1667% Total PV of Costs = \$38,715 – \$3000 tax credit + Annuity of \$416.63 for 36 months at 0.1667% = \$42,287.56 Under my assumptions, the Highlander SE is the better (less costly) option! 6. a. Feb 2013: (10)/(1+r) = 9.91 => r = (10/9.91) – 1 = 0.91% => 0.91% × 2 = 1.82% Aug 2013: 10/(1+r)2 = 9.74 => r = (10/9.74)^(1/2) – 1 = 1.326% => 1.326% × 2 = 2.65% Feb 2014: 10/(1+r)3 = 9.51 => r = (10/9.51)^(1/3) – 1 = 1.69% => 1.69% × 2 = 3.38% Aug 2014: 10/(1+r)4 = 9.38 => r = (10/9.38)^(1/4) – 1 = 1.613% => 1.613% × 2 = 3.23% Feb 2015: 10/(1+r)5 = 9.05 => r = (10/9.05)^(1/5) – 1 = 2.017% => 2.017% × 2 = 4.03% Aug 2015: 10/(1+r)6 = 8.51 => r = (10/8.51)^(1/6) – 1 = 2.726% => 2.726% × 2 = 5.45% Feb 2016: 10/(1+r)7 = 7.90 => r = (10/7.90)^(1/7) – 1 = 3.425% => 3.425% × 2 = 6.85% Aug 2016: 10/(1+r)8 = 7.22 => r = (10/7.22)^(1/8) – 1 = 4.156% => 4.156% × 2 = 8.31%

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b. Price = \$30 × 0.991 + \$30 × 0.974 + \$30 × 0.951 + \$30 × 0.938 + \$30 × 0.905 + \$30 × 0.851 + \$30 × 0.790 + \$1030 × 0.722 = \$935.66 c. 935.66 = 30/(1+y) + 30/(1+y)2 + 30/(1+y)3 + 30/(1+y)4 + 30/(1+y)5 + 30/(1+y)6 + 30/(1+y)7 +

1030/(1+y)8 => y = 3.954% => Annual yield-to-maturity = 3.954% × 2 = 7.908% d. The annual yield-to-maturity on Xerox debt must be 7.908% + 1 = 8.908%. Semiannual yield = 8.908%/2 = 4.454% Price = 30/(1.04454) + 30/(1.04454)2 + 30/(1.04454)3 + 30/(1.04454)4 + 30/(1.04454)5 + 30/(1.04454)6 + 30/(1.04454)7 + 1030/(1.04454)8 = \$903.92

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