. Find prices one period from the end. Value at Year 2:
0.5 × [(104/1.0450) + (104/1.0450)] + 4 = 103.522 0.5 × [(104/1.0325) + (104/1.0325)] + 4 = 104.726 0.5 × [(104/1.0235) + (104/1.0235)] + 4 = 105.612
Find prices two periods from the end. Time 1 values are the average of Time 2 dis- counted plus the coupon payment.
0.5 × [(103.522/1.0360) + (104.726/1.0360)] + 4 = 104.506
0.5 × [(104.726/1.0260) + (105.612/1.0260)] + 4 = 106.504
Find prices at Time 0. There is no coupon paid in this node.
0.5 × [(104.506/1.029) + (106.504/1.029)] = 102.532
because the discount rate used is an average across time.
because the calculation omits the 4 coupon in the last period.

. The investment committee is correct in that direct real investment will likely generate income and price appreciation, but their view on the diversification is incorrect. Real estate returns generally have low correlations with returns on other assets classes, such as stocks and bonds, and thus allow the endowment to diversify portfolio risk.
. Investors in direct real estate can expect to generate income by leasing or renting the property.
. Investors in direct real estate can expect price appreciation on the real estate investment.

. A reduced form model requires that one of the company’s liabilities trade; it can be a zero-coupon bond or an estimation of zero-coupon bonds from observable risky coupon bond prices that trade. In addition, the company’s default prospects are dependent on macroeconomic state variables. These explanatory variables can include such inputs as the growth rate of GDP and the level of unemployment. The model also requires a risk-free rate.
because a reduced form model requires that the state of the economy can be described as a vector of macroeconomic state variables. because a reduced form model requires that some of the company’s debt trades, either a zero-coupon or coupon bond.

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LeCompte shared with UniFlash management only the part of her report on UniFlash that provides factual information.

. Annisquam is incorrect in Comment 1. The interest rate tree performs two functions in the valuation process: (1) generating the cash flows that are interest rate dependent and (2) supplying the interest rates used to determine the present value of the cash flows.
because Comment 3 is correct. because Comment 2 is correct.