Carey_W1: Intro

Question 1

What are the four Axioms of Finance?

Answer 1

1. Investors prefer more money than less money
2. Investors are risk averse (only assume justified risks)
3. Money today is worth more than money in the future
4. Financial markets are competitive

Question 2

Four Noble winning finance insights:

Answer 2

1. Harry M. Markowitz (Optimal Portfolio Theory and diversification)
2. William Sharp ( CAPM, riskier assets have lower prices)
3. Robert Merton and Myron Scholes (pricing options)
4. Eugene Fama (Efficient Market Hypothesis)

Question 3

What is the difference between real and financial assets? and describe a way to distinguish between them.

Answer 3

Real: are assets that produce gands and generate income to the economy.
Financial: are assets that define allocation of income and wealth among investors.
If the held asset is someone else’s liability than it is financial.

Question 4

Use of financial assets:

Answer 4

1. Raising capital
2. Smoothing consumption
3. Managing risks
4. Matching heterogeneous financing needs

Question 5

Who owns the option in the following types of bonds with option features:

Answer 5

Convertible: the bond holder (it is more expensive to buy)
Callable: the bond issuer (it is cheaper)

Question 6

The adjustments that goes into pricing an asset:

Answer 6

1. Time value adjustment
2. Risk adjustment
3. Option adjustment

Question 7

longer maturity zero-coupon bonds have …….. percentage price volatility than shorter maturity zeros for the same change in interest rates.

Answer 7

greater

Question 8

What does pull to par mean

Answer 8

The prices of bonds converge into its par value as the time period decrease.