Pure Expectations Theory

In: Business and Management

Submitted By twisty
Words 759
Pages 4
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 × 15 = $150 -$25 × 10 = -$250 $20 $ if oil > $100 -$10 × 30 = -$300 $0 $30 × 10 = $300 $0 $ if oil < $100 $0 -$20 × 15 = -$300 $30 × 30 = $300 $0

5. Highlander SE: MSRP $32,845 fuel – 20 city / 25 highway Highlander Hybrid: MSRP $38,715 fuel – 28 city / 28 highway Assumptions: *Each car will drive 15,000 miles per year on highway, 25,000 miles per year in city *$3000 tax credit on hybrid *Same repair costs *Each car will need to be replaced after three years (resale value of $0) *Average gasoline price of $3.50 Monthly fuel costs: Highlander SE: 1250 hw miles / 25 mpg => 50 gallons * $3.50/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 =…...

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