1.

(2 points) If the present value of the cash flow X is -$400, and the present value
cash flow Y $250, and if the duration of cash flow stream X is 3 years, and the
duration of cash flow stream Y is 5 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 $100,000 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 that you can earn on your investment after you retire is 4% nominal
annual with annual compounding?
a. $2,500,000
b. $25,000,000
c. $250,000
d. None of the above
Mark the correct answer above and please show me why in the space between two lines below.
3. Current spot rates expressed in percent as nominal annual with semi-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 1.18% 1.33% 1.47% 1.69% 1.82% 1.95% 2.16% 2.30% 2.39% 2.59% 2.77%

You are a CFO of SLufthansa and would like to sign a contract today to borrow
money in three years from now for four 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 has taken a $400,000 mortgage on his house at an interest rate of
0.2% per month with monthly compounding. If the mortgage calls for 300 equal
monthly payments, what is the amount of each payment? 

a. $1,707.15

b. $1,774.39
c. $8,069.63
d. None of the above
Mark the correct answer above and please show me why in the space between two lines below.

5. A US government bond with a face value of $1,300 has a coupon rate of 3% with
semiannual coupons, and matures in two 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 1.18% 1.33% 1.47% 1.69% 1.82% 1.95% 2.16% 2.30% 2.39% 2.59% 2.77%

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.
Please provide your answer in the space marked bellow
b. (4 points) What is the present value of the first 4 coupons?
Please provide your answer in the space marked bellow

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)
Please provide your answer in the space marked bellow

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

Please provide your answer in the space marked bellow
6. If you invest $1000 today (Year0) into AAA project you are offered the following
cash flow stream:

Year1: $90
Year2: $50
Year3: $0
Year4: $250
Year5: $50
Yera6: $100
.
100% more each year
.
.
Year13: $12,800
Year14: $1000
Year15: $900
.
.
And then continues to pay 10% less till eternity.

Opportunity cost of capital is 7% nominal annual with annual compounding.

a) (2 points) Draw the diagram representation of the whole cash flow stream
(including the investment).
Please provide your answer in the space marked bellow
b) (2 points) What is the present value of the first four years of the project
excluding the initial investment? (e.g. what is the present value of the cash flows
received in year1, in year2, year3 and year4)
Please provide your answer in the space marked bellow

c) (4 points) What is the present value of the 9 cash flows received in years from
year 5 till the year 13 (both year 5 and year 13 included)?
Please provide your answer in the space marked bellow

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?
Please provide your answer in the space marked bellow
e) (2 points) What is the total net present value of the project AAA (including the
initial investment)?
Please provide your answer in the space marked bellow
7. The real rate of interest is 17% per year and the inflation is 2% per year (both
expressed with annual compounding.
a) (2 point) What is the nominal rate of interest expressed as nominal annual with annual
compounding?
b) (2 points) How much would that nominal rate be if expressed with daily
compounding?
Please provide your answer in the space marked bellow
a)

b)

________________________________________________________________________
8. You observe the following three stocks
Apple Microsoft Google
Value of the $886 $657 $723
firm Billion Billion Billion
Expected 20% 15% 25%
return
Standard 25% 20% 17%
deviation of
returns

Correlation coefficient between the returns of 0.5

Apple and returns Microsoft
Correlation coefficient between the returns of 0.7
Apple and the returns of Google
Correlation coefficient between the returns of 0.2
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.
Please provide your answer in the space marked bellow

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

Please provide your answer in the space marked bellow
c. (5 points) What is the standard deviation of this value weighted portfolio?
Please provide your answer in the space marked bellow
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?
Please provide your answer in the space marked bellow
9. (3 points) If the market risk premium (rm - rf) is 8%, then according to the CAPM, the
risk premium of a stock with beta value of 1.7 must be:
a. Less than 12%
b. 12%
c. Greater than 12%
d. 13.6%
e. Cannot be determined
Please provide your answer in the space marked bellow

10. (3 points) A bond has $1000 face value, a coupon rate of 5%, matures in 3 years.
Coupons are payed annually and the first coupon is due in one year from now. The yield
to maturity of the bond is 3% nominal annual with annual compounding. What is the
duration of this bond?
a. 2.86 years
b. 2.86 %
c. 3 years
d. 3%
Mark the correct answer above and please show me why in the space between two lines below.
11. You would like to invest 100.000 € 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 10% return. If economy booms 30%, while if economy is in the
crisis shares will lose -45%.
2. You can invest in shares of company B only, leading to return of 5% in normal times
in the stable economy, 10% in booming economy and -5% in a recession.
3. Or, you can invest 50% of the money in each share.
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.

a) (8 points) Please construct the outcome matrix bellow:

b) (2 points) How would you invest according to the Maximin rule?:

c) (2 points) How would you invest according to the Maximax rule?:

d) (4 points) How would you invest according to the Hurwicz principle if alpha=0.7:

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

f) (4 points) How would you invest according to the maximum expected value rule:
g) (6 points) Now, How would invest if you were to maximize your expected utility.
Your utility function is given by 𝑈𝑈(𝑒𝑒𝑖𝑖 ) = �𝑒𝑒𝑖𝑖 .