HW2W09 - Problem Set 2 ECN 134 Financial Economics Prof...

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ECN 134 Financial Economics __ Prof. Farshid Mojaver Part A: 2008 Financial Crisis How did the 2008 financial crisis happen? Part B: Present Value and Bond Valuation 1. Whitney wants to put $100,000 down on a house five years from now. She plans to make monthly payments at the end of each month (beginning 30 days from now) into an account that pays a stated annual rate of 7% interest compounded monthly. What are her monthly payments? 2. The combination of weak consumer spending and the traditional weakness of January sales has led automobile manufacturers to offer zero interest financing or cash back options to stimulate sales. Suppose you can buy the car of your choice for its negotiated price of $25,020 less $500 cash back, or you can finance the entire $25,020 car cost for 36 months at zero interest. You have the cash necessary to pay for the car in an account that earns a stated annual interest rate of 4%, compounded monthly. You will either finance it or pay cash depending on which is the best deal. (i) What is the cost of the financed car to you right now? (ii) Should you pay cash, or finance the car, and why? 3. How much would you pay per $1,000 face value for a bond with a coupon rate of 4.2% per year and two semi-annual payments remaining? The return on assets of comparable risk is 5.5% per year. 4. For a 1 year pure discount bond, compute the yield to maturity if the bond’s face value is $1,000 and the price is $950. 5. What is the future value of $100 continuously compounded for two and a half years at a stated annual rate of 12%? 6. A consol has a coupon rate of 10%, paid semiannually of course. If the market rate for securities of comparable risk is 9%, what is the price of the consol per $1,000 of face value? 7. You must decide whether or not to purchase new capital equipment. The cost of the new machine is $5,000. The appropriate discount rate is 10%. The equipment will produce cash flows of $700 at the end of year 1; $900 at the end of year 2; $1,000 at the end of each of years 3, 4, 5, and 6; $1,250 at the end of year 7; and $1,375 at the end of year 8. Should you buy the machine? 8.
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HW2W09 - Problem Set 2 ECN 134 Financial Economics Prof...

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