ECO358H1 Midterm: test1.pdf

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Show your work otherwise you will not get full credit. _____________ (25 points) (20 points) (12 points) (15 points) (72 points) Problem-1 [25 points]: answer the following short questions. False: if both are fairly priced the npv will be zero and both will be identical investments. If one sells lower than the intrinsic value [e. g. p=(d/r-g)] then that stock will be an attractive investment: [5 points] a junk rated commercial paper (with a face value of 100) is currently selling for. The market probability of default should have been 48. 14%: [5 points] the treasury bill is considered risk free because holders is assured that the government is going to pay its obligation. False: the treasury bill is considered risk free because it does not move as much. The fact that the holder is assured payment makes it default-free (and not risk free): [5 points] you are an investor who is characterized by dara (declining absolute risk.

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