DEPARTMENT OF FINANCE, INSURANCE, & LAW COLLEGE OF BUSINESS ILLINOIS STATE UNIVERSITY Spring 2006 FIL 242 Investments

s Ahlgrim HOMEWORK SET #2 Due March 22nd at the beginning of class 20 points
Answer the following questions on a separate sheet of paper. You must complete the assignment in groups of between two and four people (you are free to choose the groups). If you use Excel to do any work, print out the worksheet and indicate the formula that you used. To display formulas on your worksheet before printing, under the Tools menu, point to Formula Auditing, and then click Formula Auditing Mode.

1. You are given the following information about three stocks. Note that stock C splits two-for-one in the last period. P is the price of the stock (per share) and Q is the number of shares outstanding. Stock P (Time 0) Q (Time 0) P(1) Q(1) P(2) Q(2) A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (time 0 to time 1). b. If the initial divisor is 3.0, what is the divisor after the second period (at time 2)? c. Calculate the return of a market value weighted index in the second period (time 1 to time 2). 2. Use Excel and the report facility in Baseline to answer the following questions. Also, use the 30 stocks in the Dow Jones Industrial Average. a. Get prices for the 30 stocks at the end of 2005 (12/30/05) and the end of February 2006 (2/28/06). To get historical prices in the report screen, put in the current price of the stock, right click the finished report data and change the time period. Youll have to do this twice to get the two prices. (i) Using a divisor of 30, calculate the return on a price weighted index over the two month horizon. (ii) Compare this result with the actual values of the index on those two days. b. Get the market values of the companies in the DJIA. Calculate the return on a market value weighted index of these 30 stocks over the two month period. 3. For a 65 day T-bill, the quote is 5.52. Determine the price, HPR, BEY, and EAR from this quote. Assume the face value of the T-bill is $1 million. What is the 65-day interest rate? 4. Use the pure expectations theory to determine the 2-year interest rate that is expected two years from today based on the following interest rate information. Maturity Spot Rate 1 year 5.25% 2 years 6.05% 3 years 6.95% 4 years 7.25%