Final Exam
Due May 14 at 7:40pm
Points 240
Questions 21
Available May 13 at 7:40pm - May 14 at 7:40pm 1 day
Time Limit 120 Minutes
Instructions
MGMT E-2000 Principles of Finance
FINAL EXAM
Grader: Email:
1a, 1b, 1c, 4a, 4b
Doreen
doreen.pset@gmail.com (mailto:doreen.pset@gmail.com)
2a, 2b, 3b, 3c
Chenzi
chenzi.pset@gmail.com (mailto:chenzi.pset@gmail.com)
3a, 5, 6a, 6b
Nathan
nathan.pset@gmail.com (mailto:nathan.pset@gmail.com)
2c, 7a, 7b, 7c
Olivia
olivia.pset@gmail.com (mailto:olivia.pset@gmail.com)
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Questions:
May 13, 2015 at 7:40pm US Eastern to May 14, 2015 at 7:40pm US Eastern
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Please remember that all work must be shown, i.e. any equations or formulas used must be specified, and the basis for any numerical answers must be clearly demonstrated.
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Please label all graphs.
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This exam is 2 hours long. Points per question are double the minutes indicated after the question number.
Attempt
Time
Score
Attempt 1
112 minutes
231 out of 240
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Attempt History
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LATEST
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 Correct answers are hidden.
Submitted May 14 at 11:45am
This attempt took 112 minutes.
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Score for this quiz: 231 out of 240
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Question 1
2 / 2 pts
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1(a). (1 minute) What is the name of the interest rate the Fed changes through open market operations (OMOs)?
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Your Answer:
The Fed changes the Fed Funds Rate in order to manipulate the Money Supply.
The Fed Sells Bonds in the open. If the Fed wants to raise the nominal interest rate, The fed will sell Bonds, so Bond's Dealer pays for bonds in
cash. the Fed sets in motion the reverse money multiplier effect to decrease Banks' reserves in the economy that will cause total money supply to go
down. This leads to increase in nominal interest rate.
Question 2
4 / 4 pts
1(b). (2 minutes) The current target for this interest rate is a band between 0 and 25 basis points. Suppose on a given day, the rate looks like it
might go above the upper limit of the band. Describe what OMO the Fed would conduct in order to lower the rate so that it stays within the band?
Your Answer:
In the given case, the fed would want to decrease target rate by buying bonds.
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Question 3
10 / 10 pts
1(c). (5 minutes) Suppose the size of the OMO you described in part (b) was $100 Million, the reserve requirement is 10%, banks are holding 10% in
excess reserves, and there is no change in cash held by the public in response to the Fed action. By how much will the money supply change as a
result of this OMO? Show your calculations
Your Answer:
R = 10%
E = 10%
Buying bonds = $100 M
MM= 1 /(R + E) = 1/(0.1+0.1) = 5
ΔTotal Deposits
= Initial Deposit * Money Multiplier
$500M = 5*$100M
ΔTotal Money Supply = ΔTotal Deposits
ΔCash Held By Public
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ΔTotal Money Supply = $500M + 0 = $500M Total money supply will rise by $500M
Question #2 Setup:
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2. (25 minutes) Below is the balance sheet for Pacific Northwest Bank. Assume the items listed are the bank’s only assets and liabilities, the reserve
requirement is 10%, and that Pacific Northwest is holding $1.5 Billion in excess reserves.
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Pacific Northwest Bank Balance Sheet
Vault Cash
Liabilities
$ 200 Million
Checking Deposits
$
Savings Deposits $8 Billion
1.8 Billion
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Deposits with the Fed
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Assets
$ 8 Billion
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Loans
$ 4 Billion
Bank Capital
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T-Bonds
20 / 20 pts
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Question 4
2(a). (10 minutes) What must be the total amount of checking deposits?
Your Answer:
Total Reserve = $1800 M+ $200 M = $2 B
R = $2B - $1.5B = $0.5B = 10%
$0.5 B = 10% * Checking Deposits
Checking Deposits = $5B
Question 5
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2(b). (5 minutes) What is the amount of the bank’s capital?
Your Answer:
Bank Capital = Assets – Liabilities
10 / 10 pts
Assets = $2B + $8B + $4B = $14 B
Liabilities = $ 5B + $8B = $13 B
Bank Capital = $14Billion - $13 Billion = $1Billion
20 / 20 pts
Question 6
2(c). (10 minutes) Suppose a local resident, Bill Gates, withdraws $1Billion from his checking account at Pacific Northwest to fund his next operating
system, “Windows FU.” He holds the money in cash in the safe of his Richmond mansion.
By how much will the money supply change as a result of Gates’ withdrawal? Show your calculations.
Your Answer:
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We need to solve the MM = 1/(R+E) = 1/(0.4)=2.5
MM= 2.5
Δ Deposits = -1B*2.5=-2.5 billion
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Δ Money supply = -2.5+1=-1.5
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3(a). (5 minutes) Find the price of the following bond:
10 / 10 pts
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Question 7
F = $1,000
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c = 8%
T = 2
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i = 10%
Your Answer:
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Show your work, including any equation(s) you use.
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Pb=80/(1+0.1)+ 1080/(1+0.1)^2=965.29
4 / 4 pts
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Question 8
3(b). (2 minutes) What is the yield of a bond which has a face value of $5,000, a coupon rate of 5%, matures in five years, and sells for $5,000?
Your Answer:
current yield=cash inflows/price=5000*0.05/5000=5%
Question 9
20 / 20 pts
3(c). (10 minutes) What is the face value of a zero coupon bond which matures in exactly four years, has a price of $6,000 and a yield of 4%? Show
your calculations.
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Your Answer:
6000=(FV)/(1+i)^4
(1.04)^4 * 6,000 = 7020
Question #4 Setup:
4. (18 minutes) For parts a. and b. below, assume the following:
E(rM) = 7%
rF = 2%
Expected risk premium on Boeing stock = 7%
4(a). (9 minutes) What is the expected return on Boeing stock? Show your work.
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Your Answer:
18 / 18 pts
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Question 10
CAPM= E(Rs)-rf=B(E(rm)-rf)
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7%=B(7%-2%)
7%= B(5%)
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B= 7%/5%=1.4
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Expected Return= rf+1.4(5%)=9%
18 / 18 pts
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Question 11
Your Answer:
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4(b). (9 minutes) What is the value of β for Boeing stock? Show your work.
CAPM= E(Rs)-rf=B(E(rm)-rf)
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7%=B(7%-2%)
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7%= B(5%)
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B= 7%/5%=1.4
Question 12
10 / 10 pts
5. (5 minutes) What is the difference between “European” and “American” options?
Your Answer:
European options cant be exercised before maturity, but American options can be exercised any time until maturity.
Question #6(a) Setup:
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6(a). (15 minutes) The following is a table showing the prices of options on XYZ stock at the close of trading on Wednesday, May 13, 2015. XYZ
closed that day at $30.86 per share.
XYZ CORP
30.86 -0.10
May 13, 2015 @ 16:00 ET
Bid 30.86 Ask 30.86 Size 1000x134 Vol 79915648
Last
Calls
Sale
Net
Bid Ask Vol
Open
Int
15 June 29.00 (MSQ1016A29-E)
Last
Puts
Sale
Net
Bid Ask
15 June 29.00 (MSQ1016M29-E)
(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 1.88 -0.15 1.84 1.90 1043
40339 (http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.01 -0.01 0.0 0.01
ticker=MSQ1016A29-E)
ticker=MSQ1016M29-E)
15 June 30.00 (MSQ1016A30-E)
15 June 30.00 (MSQ1016M30-E)
(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.90 -0.10 0.84 0.90 8024
132825 (http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.01 -0.02 0.0 0.01
ticker=MSQ1016A30-E)
ticker=MSQ1016M30-E)
15 June 31.00 (MSQ1016A31-E)
15 June 31.00 (MSQ1016M31-E)
(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.01 -0.20 0.0
0.01 9038
49459 (http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.10 -0.12 0.11 0.16
ticker=MSQ1016M31-E)
15 June 32.50 (MSQ1016A32.5-E)
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ticker=MSQ1016A31-E)
15 June 32.50 (MSQ1016M32.5-E)
(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.01 0.0
0.0 0.01 0
ticker=MSQ1016A32.5-E)
70513 (http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 1.60 +0.16 1.60 1.66
ticker=MSQ1016M32.5-E)
15 July 29.00 (MSQ1020B29-E)
15 July 29.00 (MSQ1020N29-E)
3829
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(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 2.19 -0.09 2.14 2.19 306
ticker=MSQ1020B29-E)
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15 July 30.00 (MSQ1020B30-E)
(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 1.47 -0.13 1.41 1.46 3410
15 July 31.00 (MSQ1020B31-E)
ticker=MSQ1020N29-E)
15 July 30.00 (MSQ1020N30-E)
25979 (http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.63 -0.01 0.63 0.66
ticker=MSQ1020N30-E)
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ticker=MSQ1020B30-E)
(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.35 +0.02 0.34 0.37
15 July 31.00 (MSQ1020N31-E)
(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 1.10 +0.05 1.08 1.12
ticker=MSQ1020B31-E)
ticker=MSQ1020N31-E)
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(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.88 -0.11 0.85 0.89 10065 77435
15 July 32.00 (MSQ1020B32-E)
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(http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 0.50 -0.08 0.46 0.50 1601
42838 (http://www.cboe.com/DelayedQuote/SimpleQuote.aspx? 1.71 +0.05 1.70 1.74
ticker=MSQ1020N32-E)
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ticker=MSQ1020B32-E)
15 July 32.00 (MSQ1020N32-E)
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Question 13
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In the questions that follow, use the “Last Sale” column to answer questions which involve option pricing.
6 / 6 pts
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6(a) i. What was the intrinsic value of the June 29 call (i.e., the call which expires in June and has a strike price of $29.00)?
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Your Answer:
June 29
Intrinsic value= stock price- strike price=30.86-29=1.86
Question 14
6 / 6 pts
6(a) ii. Is the July 30 call “in” or “out” of the money?
Your Answer:
Intrinsic value= stock price- strike price=30.86-30=0.86 Intr value>0 => option in the money
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Question 15
6(a) iii. What is the time value of the July 31 call?
6 / 6 pts
Your Answer:
Intrisic value=0
Time value= option premium – intrinsic value =0.88-0=0.88
6 / 6 pts
Question 16
6(a) iv. What is the intrinsic value of the June 32.50 put (i.e., the put which expires in June and has a strike price of $32.50)?
Your Answer:
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Intrinsic value of put = Strike price - stock price= 32.5-30.86=1.64
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Question 17
6(a) v. What is the time value of the July 31 put?
Your Answer:
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Intrinsic value of put=0
0 / 6 pts
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Time value=1.10-0=1.10
20 / 20 pts
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Question 18
6(b). (10 minutes) Draw a “hockey stick” diagram for a long position (i.e. from the perspective of a buyer) in the July 32 put. Clearly state and show
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on the graph: The maximum possible loss; the maximum possible gain; the strike price; and the break-even point.
***Click Here to make your life easier by downloading the Microsoft Word Template for Hockey Stick Diagrams***
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Reminder: Watch Teo's Walk-Through on Creating Graphs Below:
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Canvas Tutorial - Creating Graphs.mp4
Hint: You can view a full screen version of the video by clicking on the "Full Screen" button in the lower right corner of the video player or right click
on the blue link ("Canvas Tutorial - Creating Graphs.mp4") above and select "Save As" to download the video. If you've already clicked play on the
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video but decide you want to download it, you'll need to reload this page (try pressing F5) for the blue link to appear again.
 18.png
(https://instructure-uploads.s3.amazonaws.com/account_18750000000000001/attachments/519030/18.png?
AWSAccessKeyId=AKIAJFNFXH2V2O7RPCAA&Expires=1435011047&Signature=u8gBmQeMKLIV94ACil8ovAtGjOQ%3D)
Question #7 Setup:
7. (22 minutes)
Assume the stock of Dismal Seepage Waste Disposal Co. can be at any of the following prices on June 1, with the associated probabilities as
shown:
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Price
Prob.
$10
.4
$15
.3
$20
.2
$25
.1
Hint: If you decide to create a table in answering any of the questions below, you may find it useful to Watch Teo's Walk-Through Below:
Canvas Tutorial - Creating Tables.mp4
Hint: You can view a full screen version of the video by clicking on the "Full Screen" button in the lower right corner of the video player.
10 / 10 pts
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7(a). (5 minutes) What is the expected value (EV) of Dismal Seepage stock? Show your calculations.
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Question 19
Your Answer:
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EV=0.4*10+15*0.3+20*0.2+25*0.1=15
24 / 24 pts
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Question 20
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7(b). (12 minutes) What will be the price of a put with a strike price of $20 which expires on June 1? Show your calculations.
10
15
20
probability 0.4
0.3
0.2
5
0
Gain from put
10
0.1
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Question 21
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EV of put=0.4*10+5*0.3+0*0.2+0*0.1=5.5
25
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Price
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Your Answer:
7 / 10 pts
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7(c). (5 minutes) Explain why increased volatility in the price of the underlying stock increases the price of an option on that stock.
Your Answer:
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Volatility has the same effec on calls and puts. Higher volatility leads to higher option premiums because greater risk is associated with selling this
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option. According EMH, here is no free lunch. Higher risk leads a possible increase in gains for buyer, so the premium buyers pay got to be higher.
Quiz Score: 231 out of 240
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