(a) Compute the yield to maturity of A and B. Which project is more profitable?Now suppose two other projects are also available for investment.Project C: You pay an investment cost of $1150 one year from nowand receive$1600 three years from now.Project D: You pay an investment cost of $1300 two years from nowand receive$1650 four years from now.(b) You can invest in multiple projects as long as you have enough money to pay theinvestment cost. For example, you can invest in Project A now, receive $1150 afterone year and then reinvest $1150 in Project C. Which investment strategy (i.e.combination of projects) delivers the highest yield to maturity?3. [Data Exercise] (a) Plot the M1 and M2 money stock in the US from 1990-2015.(Hint: You may use the data tools provided byFRED.)(b) Plot the nominal interest rate from 1960 to 2014. (Hint: You can either use thedaily interest rates for selected U.S. Treasury, private money market and capitalmarket instruments fromor the effectivefederal funds rate fromFRED.)(c) TheConsumer Price Index(CPI) is a measure of the average change over time inthe prices paid by urban consumers for a market basket of consumer goods andservices. Intuitively, the CPI represents the cost of living or the average price level.Plot the CPI from 1960 to 2013.(d) Theinflation rateis the yearly percentage change in the average price level. Inpractice, we usually use the percentage change in the CPI to compute the inflationrate. Plot the inflation rate from 1960 to 2013.(e) Explain the difference between theex-anteandex-postreal interest rate. Use theFisher equation to compute the ex-post real interest rate. Plot the nominal interestrate and the ex-post real interest rate from 1960 to 2013 in the same graph.
