PS #5 Fall 2011 - Economics 314-1 Fall 2011 Problem Set 5...

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Economics 314-1 Fall 2011 Problem Set 5 Due on Thursday, Dec. 1 Question 1: a. Firms such as Moody’s and Standard & Poor’s study corporations that issue bonds. They publish “ratings” for the bonds-evaluations of the likelihood of default. Suppose these rating companies went out of business. What effect would this have on the bond market? What effect would it have on banks? b. National credit bureaus collect information on people’s credit histories. They are likely to know whether you ever defaulted on a loan. Suppose that a new privacy law makes it illegal for credit bureaus to collect the information. What effect would this have on the banking industry? Question 2: a. Consider two stocks. For each, the expected dividend next year is $100 and the expected growth rate of dividends is 3 percent. The risk premium is 3 percent for one stock and 8 percent for the other. The economy’s safe interest rate is 5 percent.\ i. What does the difference in risk premiums tell us about the dividends from
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This note was uploaded on 11/30/2011 for the course ECON 3140 taught by Professor Mbiekop during the Fall '07 term at Cornell University (Engineering School).

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PS #5 Fall 2011 - Economics 314-1 Fall 2011 Problem Set 5...

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