FINANCIAL ECONOMICS FINAL EXAM – 2015 _________ TYPE A EXAM

NAME …………………………………………………………………………………………….
GROUP …………………………………………………………………………………………..
DEGREE………………………………………………………………………………………..

Rules of the exam:

A- Mark your final answer in the solutions sheet. We will only consider the answers
in that sheet.
B- Correct answer: + 1. Incorrect answer: -0.33. No answer: 0.
C- There is just one correct answer in each question.
D- You must write all your calculus in the exam sheet (this does not apply to
theoretical questions).
E- Mobile phones are not permitted.
F- Time: 2h30min.
G- You must deliver both the exam question and the answer sheets.

1. Félix Pérez has been working during his whole life, and he is now planning to retire
(there are 7 years left). He is planning to do an investment plan that would allow him to
live comfortably from then on. When he retires he would like to have a total capital of
100.000 euros, in order to travel. If the annual interest rate is 5%, what should be the
amount to be deposited on a monthly basis, in order to reach that capital, and
assuming that deposits are made at the end of each month.
a. Between 3600 and 3900 euros
b. Between 970 and 1050 euros
c. Between 500 and 700 euros
d. None of the previous answers is correct.

2. Assume that César holds a 10 year mortgage (with quarterly payments), and an
initial debt of 400,000 € with BBVA. This bank charges an annual interest rate equal to
the EURIBOR plus a differential of 1.00%. If the EURIBOR is 3.5%, determine the
constant amount that should be paid by César.
a. Between 12,420 and 12,439 euros
b. Between 12,100 and 12,355 euros
c. Between 10,700 and 10,800 euros.
d. None of the previous answers is correct.

3. Determine the final value in 25 years and 6 months, of an amount equal to 10,000€
paid today (t0). Assume compounded capitalization, and the compound interest rate is
6.00%.
a. 46181.77 euros
b. 2165.35 euros
c. 44187.51 euros
d. None of the previous answers is correct.

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4. Select the correct answer:
a. The basic function of primary markets is to provide liquidity
b. The basic function of secondary markets is to allow firms raise funds.
c. An arbitrage operation implies obtaining a positive profit at zero risk,
and without any cost.
d. A financial analysis is an agent that evaluates shares that are either
undervalued or overvalued using as a unique tool historical prices of those
shares (and specially focusing on graphs that are formed with those historical
prices)

5. A ten year old child will receive from 18 years onward, an annual rent, that will be
paid at the beginning of year, with an initial value of 4,000 euros, and that will increase
at a 5% annual rate. What is the present value if the annual interest rate is 8%?
a. Between 10,000 and 12,000 euros.
b. Between 12,000 and 14,000 euros.
c. Between 14,000 and 16,000 euros.
d. None of the above.

6. Assume an investment with an initial investment at time t=0, and positive cash-flows
from t=1 until maturity. Mark the false sentence.
a. We have to invest in the project if its NPV is bigger than zero.
b. We have to invest in the project if its cost of capital is lower than IRR.
c. If the NPV of this project is zero, then its return is zero.
d. If two firms develop this project, the firm whose cost of capital is lower will
obtain a higher NPV.

7. Here is the variance-covariance matrix of assets A, B and C. Compute the volatility

of an equally weighted portfolio composed by these three assets.

A B C
A 0,04 -0,002 0
B -0,002 0,0225 0,003
C 0 0,003 0,0625

a. Between 8% and 9%.

b. Between 11% and 12%.
c. Between 14% and 15%.
d. Between 17% and 18%.

8. Consider a portfolio composed by a large number of stocks. In this portfolio,

a. The total risk of the portfolio is always equal to zero.
b. The idiosyncratic risk tends to infinity.
c. The systematic risk is zero.
d. The idiosyncratic risk tends to zero.

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9. According to the Payback criteria, what is the best project?

YEARS
PROYECT 0 1 2 3 4 5
1 -40 10 10 5 3 30
2 -25 5 5 10 15 15
3 -20 5 5 5 10 15
4 -15 7 8 2 2 2

a. Project 1.
b. Project 2.
c. Project 2 or 3, indistinctly.
d. Project 4.

10. Systematic risk,

a. It is possible to diversify by investing in different assets.
b. It cannot be eliminated by diversification.
c. It is the idiosyncratic (or individual) risk of any firm.
d. Answers B and C are correct.

11. Assume that investors can access to the same investment opportunity set, which
includes both risk and risk-free assets. According to the mean-variance (Markowitz)
model, mark the correct answer:

a. The optimal portfolio depends on the investor’s risk aversion level.

b. In absence of risk-free asset, there exists a set of efficient portfolios, but
there is no optimal portfolio.
c. Dominated portfolios are (mean-variance) efficient portfolios.
d. The minimum variance portfolio is the optimal portfolio, no matter the investor’s
risk aversion level.

12. In which case is it possible to build a risk-free portfolio?

a. When the correlation coefficient is equal to 0.

b. When the correlation coefficient lies in the interval (-1, 1).
c. When the correlation coefficient is equal to 1 and short selling is not allowed.
d. None of the above.

13. Within the Markowitz model framework, assume that the market portfolio has an
expected return of 12% and standard deviation 25%; the return of the risk-free asset is
2%. Which weights would you assign to each asset type in order to reach a 20%
portfolio return?

a. 25% in the risk asset.

b. 50% in the risk free asset.
c. 80% in the risk free asset.
d. 180% in the risk asset.

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14. Under the CAPM model, assume that the market expects a 10% for the company
Fedex, its Beta is 0.9, the expected market return is 8% and the return of the risk free
asset is 0.30%:

a. The price of this asset should fall in order to be correctly priced.

b. This asset is correctly priced.
c. The price of this asset should rise in order to be correctly priced.
d. None of the above.

15. Choose the correct answer:

a. According to the CAPM, two assets with the same idiosyncratic risk have the
same expected return.
b. According to the Markowitz model all assets have a value of Beta equal to 1.
c. The slope of the SML is determined by the value of Beta.
d. According to the CAPM, the expected return is determined by the
systematic risk, which is measured by the value of Beta.

16. The quoted price of shares of company GAME TECHNOLOGY is 29$ today. The
price of a call option on the same share is 8$, with a strike of 33$. The price of a put
option on the same share is 12$, with a strike of 33$. If the call and the put have the
same expiration date, the face value and repayment of a bond with the same expiration
date is 33$, with a price of 28$, which of the following statements is true (only one).
a. Put-call parity holds.
b. Put-call parity doesn’t hold. Then the investment strategy to follow is to buy
the stock and the put, to sell the call and short sell the bond.
c. Put-call parity doesn’t hold. Then the investment strategy to follow is to buy
the call, buy the bond, buy the put and short sell the share.
d. Put-call parity doesn’t hold. Then the investment strategy to follow is
to buy the call, buy the bond, sell the put and short sell the share.

17. The following investment strategy consists of:

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 a. Sell a put option with a price of 20, buy a call option with a price of 20. The
same underlying asset, the same expiration date and the same strike of
100.
b. Buy a put option with a price of 20, buy a call option with a price of 20. The
same underlying asset, the same expiration date and the same strike of
100.
c. Buy a put option with a price of 20, sell a call option with a price of 20. The
same underlying asset, the same expiration date and the same strike of
100.
d. Sell a put option with a price of 20, sell a call option with a price of 20.
The same underlying asset, the same expiration date and the same
strike of 100.

18. Compute the price difference between a call and a put option on the same stock.
The strike price of both options is $40. The stock price is $50, and the (annual) risk-free
rate is 2.35%. The maturity of the options is 1 year.
a. 10.91$.
b. 11.90$.
c. 50.01$.
d. 9.34$.

19. Compute the modified duration of a 4-year bond, annual coupon rate of 5%, 3%
interest rate and face value equal to 1,000€:
a. 3.63 years.
b. 3.73 years.
c. 1074.34€.
d. 50€

20. A four year Spanish Treasury bond pays an annual coupon of 5% (always at the
end of each period). The spot interest rates from year 1 to 4 are 2%, 3%, 4% and 5%,
respectively. The face value of the bond is 1,000€, and the bond amortization at
maturity is 120% of its face value. Calculate the price of the bond today.
a. 1168.98€.
b. 1437.14€.
c. 1440€.
d. None of the above.

21. A twenty year Spanish Treasury bond gives an annual coupon of 3% (always at the
end of each period). The annual interest rate expected in the market next twenty years
is 3%. The face value of the bond is 1,000€, and the repayment (amortization) is at par.
Calculate the price of the bond today.
a. 1,000€.
b. 1,600€.
c. 500€.
d. 750€.

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22. We know that 0R1=0.03, 0R2=0.04 and 0R3=0.05. Calculate the expected forward
interest rate for the period between years 1 and 3.
a. 4.459%.
b. 6.01%.
c. 5.50%.
d. 4.00%.

23. A farmer is worried about the price of wheat in the future. The average price of
wheat during last years has been of 30$/ton. There has been mild weather during past
winter so the crop is expected to surpass all expectations, and the farmer expects a
drop in price. Which of the following strategies is the best one to hedge against a drop
in wheat prices?
a. Short forward with forward price (K) $30.
b. Long forward with forward price (K) $30.
c. Short put option with strike price $30.
d. Long call option with strike price $30.

24. You read in a newspaper the following information about the prices of different
zero-coupon Spanish Treasury bonds:
Quoted Price in the
Face Value Secondary Market Maturity (years)
1000 985 1
1000 965 2
1000 945 3
1000 930 4
1000 875 5
1000 760 6
According to this information, what is the correct yield curve?

Answer r1 r2 r3 r4 r5 r6
a. 4,68% 2,71% 1,83% 1,90% 1,80% 1,52%
b. 2,52% 2,80% 2,90% 2,83% 3,71% 5,68%
c. 1,52% 1,80% 1,90% 1,83% 2,71% 4,68%
d. 1,52% 1,80% 1,83% 1,90% 4,68% 2,71%

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