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101 a rates and financial market news. Summarize the current financial market conditions. summary of recent venture capital inve performance. Summarize the return ex for the various venture-investing rounds. vital investment return experience Exercises/Problems 1. [Inflation and Risk Premiums) Voice River, Inc, provides media-on-demand services via the Inte Management has been studying current interest rates. A lender is willing to make a two-year loan Voice River at a 12 percent annual interest rate. The U.S. government is currently paying 8 percen annual interest on its two-year securities. A. If the real rate of interest is expected to be 3 percent annually, what is the inflation premium expected at this time? B. What is the amount of the total risk premium that Voice River will have to pay C. If a 1 percent liquidity premium is built into the 12 percent rate, what is the default risk premium on the loan? 2. [Maturity and Default Risk Premiums) Following is interest rate information currently being observed by the Electronic Publishing Corporation: One-year U.S. government securities One-year bank loans Five-year U.S. government securities Five-year bank loans 4.5% 6.0% 70% 9.5% A. What is the amount of the maturity risk premium on one-year versus five-year U.S. government securities? B. What is the amount of the maturity risk premium on one-year versus five-year bank loans? C. What is the default risk premium on one-year bank loans and on five-year bank loans? 3. (Expected Rate of Return and Risk Measures) A venture investor, BKAngel, is considering investing in a software venture opportunity. However, the rate of return to be realized next year is likely to vary with the economic climate that actually occurs. Following are three possible economic outcomes, the proba- bility that each one will occur, and the rate of return projected for each outcome: ECONOMIC CLIMATE RATE OF RETURN Recession Normal Rapid growth PROBABILITY OF OCCURRENCE 0.25 0.50 0.25 -20.0% 15.0% 30.0% A. What is the expected rate of return on the software venture? B. Calculate the variance and standard deviation of the rates of return for the software venture. C. Calculate the coefficient of variation of the rates of return for the software venture. If the coefficient of variation of the rates of return for BKAngel's prior venture investments is 1.5, would the software venture be considered as being less or more risky? 4. [Expected Rate of Return and Risk Measures] A potential venture investment has the following possible outcomes: PERFORMANCE OUTCOME PROBABILITY OF OCCURRENCE RATE OF RETURN Home run (success) Breakeven Strikeout (failure) 0.15 0.35 0.50 500.0% 15.0% -100.0%

Answer 1

Venture
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.25	-20	-5	-30	0.0225
Normal	0.5	15	7.5	5	0.00125
Boom	0.25	30	7.5	20	0.01
	A. Expected return %=	sum of weighted return =	10	Sum=B. Variance Venture=	0.03375
			B. Standard deviation of Venture%	=(Variance)^(1/2)	18.37
			C.Coefficient of variation=	Std. dev./return=	1.837

C.

Higher the CV riskier it is . As this venture has CV higher than 1.5 it is more risky