Econ435 Problem Set 1: Financial Markets and Macroeconomy - Questions and Solutions - Prof, Assignments of Economics

Download Econ435 Problem Set 1: Financial Markets and Macroeconomy - Questions and Solutions - Prof and more Assignments Economics in PDF only on Docsity! Econ435 – Financial Markets and the Macroeconomy Problem Set 1 Due: Wednesday, July 25 Question 1 One proposal for dealing with the principal-agent problem in corporate finance, partly incorporated in the Sarbanes-Oaxley Act of 2001, is to make CEOs and/or CFOs financially responsible for the accuracy and truthfulness of company reports (to avoid cases like Enron). Its opponents argue that it would make it harder to find good managers, since the possibility of financial or even penal action against them would scare them away. Briefly explain (in at most 2 paragraphs, or with a bullet list) your position on this issue. Question 2 The prices of stocks X, Y and Z evolved as in the table below. Notice the 3-for-1 stock split for stock X in year 1. Any index includes only these three stocks. Calculate the Year 0 Year 1 Price ($) Number of shares Price ($) Number of shares Stock X 75 30 28 90 Stock Y 15 130 14 130 Stock Z 105 15 102 15 following: (i) the price-weighted index in years 0 and 1, (ii) the value-weighted index in year 1, if the index in year 0 is I0 = 10, 000 points. Question 3 A municipal bond offers a 10% interest rate, while a corporate bond offers a 12% interest. What is the tax rate that makes an investor indifferent between the two bonds? What is the 1