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Unformatted text preview: ECON 3310: Money and Credit Problem Set 1 Instructor: Karel Mertens Due in Class on Wednesday September 23 1. Provide definitions of the following: a. yield to maturity b. coupon rate c. current yield The definition should be in words and in formula. 2. Show that yield to maturity of a perpetuity is C/P c where C is yearly payment and P c is price of the perpetuity. 3. You won a lottery of 100 million dollars. Luckily no tax is levied. However, you should chose one of the two following methods of payment: a. 100 million in one payment today. b. 10 payments of 11 million for 10 years. First payment is given to you today. Assume that there is no risk of criminals to take away your money, that you are mentally stable enough to handle your winning rationally, and that you are healthy enough to live for more than 10 years. Assume that interest rate is fixed at 10% forever. This assumption on the interest rate holds for problem a)c)....
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 '07
 Davis
 Interest Rates, C. current yield, yearly payment, maturity b. coupon, payment today. b.

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