OSU, FISHER COLLEGE OF BUSINESS, MBA 810 QUIZ, WINTER 2001 You are allowed 1.5 hours for this exam. There is substantial credit for method. 1. Five years ago, Karen took out a 20-year $200,000 mortgage at 9% compounded monthly. Now (t=0), the rate for a 15-year mortgage is 7.75%. Furthermore, Karen is sure that the rate will fall to 7.25% for a 10-year mortgage in 5 years hence (t=5). She has decided to refinance. So, the only question is whether (a) to refinance now or (b) to refinance later in 5 years when the rates will be lower. There is a $5,000 penalty (or costs) whenever she refinances, and she plans to include it in any refinancing she undertakes. Which is better, (a) or (b)? [Ignore all other strategies, such as refinancing now and again refinancing later.] (10 points) 2. IGNORE THIS PROBLEM: To compare the performance of two MBA programs, consider the following data: School A School B • Year one tuition to be paid at t=0 $10,000 $20,000 • Year two tuition to be paid at t=1
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