Finance Seminar Essay

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Seminar 1, Finance Chapter 3 problems: 3.12 Suppose Bank One offers risk-free interest rate of 5,5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% of both savings and loans. a) What arbitrage opportunity is available? a. Borrow money from Bank One and invest them at Bank Enn. 3.16 (ETF=exchange traded fund) a) 138 b) Sell the portfolio and buy the ETF c) Reverse, borrow the share of the ETF, buy the portfolio and give back the ETF. 3.A5 There’s always one price of selling (higher) and one price of buying (lowing), this is called the Bid-ask spread and exist in all stock markets. a) As long as the intervals don’t overlap, you have a arbitrage opportunity. When no overlapping you can sell from one market and sell at the other but this very very rarely happens! Chapter 4 problems: “We prefer to have more money in the future than today”. Interest rate comes from that people want to have a higher expected wealth in the future. The higher the risk the higher the interest rate. 4.11 a) 100/1,08 + 100/1,08^2 + 100/1,08^3 = PV b) 100*1,08^2 + 100*1,08 + 100 = FV c) Same answer as b) 4.14 Draw a timeline so you know where you are! a) Today 1 year 2 years 10 years -10.000 500 1.500 10.000 NPV = -10.000 + 500/1,06 + 1.500/1,06^2 + 10.000/1,06^10 = -2.609,36 If the interest rate were lower the project would be positive. Thus, high amounts far away in the future are onle worth if the interest rate is very low. 4.18 Consol Bond = Perpetuity. 4.38 The interest rate that would make the NPV = 0 is called the IRR. Now $5000, in a year pay $6000. NPV= -5000 + 6000/1+r r= 1/5 = 20% Chapter 6 problems 6.3 “Expected to last forever” - > Perpetuity NVP = -100 + 30/0,08 = 275 6.21 a) | Year 0 | Year 1 | Year 2 | Year 3 |

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