ECN 134
Financial Economics
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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 semiannual 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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 Summer '08
 MOJAVER
 Economics

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