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mid1-W09 - Financiad Economics ECN134 Midterm 1 Winter 2009...

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Financiad Economics ECN134 Midterm 1 Winter 2009 Prof. Farshid Mojaver *********************************************************************** * [20 pts] 1- Some Financial Terms and Ideas i. What is securitization? ii. What is financial engineering? iii. What is Credit Default Swap (CDS)? iv. How might CDS have contributed to the current financial crisis? [11 pts] 2-Derivation of the formula for Growing Annuity Show that the present value of a growing annuity that pays a stream of cash flows C and grows at a constant rate g for a fixed number of periods T can be simplified to : [12 pts] 3- Annuity Weak consumer spending 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 $16,200 less $500 cash back, or you can finance the entire $16,200 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. a. What is the cost of the financed car to you right now? b. Should you pay cash, or finance the car, and why?
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