Problem Set 24 | Financial Markets and Economic Fluctuations | ECON 423, Assignments of Financial Market

Download Problem Set 24 | Financial Markets and Economic Fluctuations | ECON 423 and more Assignments Financial Market in PDF only on Docsity! PRINT Name _________________________________________________________ Professor Byrns Econ 423: Financial Markets Problem Set 24 Show relevant calculations in an attached Excel spreadsheet. 1. The rate of return for an asset which costs $1,500 today and pays $1,800 a year from now is: (a) 5 percent. (b) 10 percent. (c) 15 percent. (d) 17.5 percent. (e) 20 percent. 2. Perpetually Perplexed has been offered a bond that pays $2500 every year forever and the market interest rate for bonds with similar risk is 12%. The current price of the bond is: (a) $2500. (b) $3000. (c) $10000. (d) $12000. (e) $20,833. 3. Warren Buffet has forgotten how to calculate the discount price on a bond. The Worldcom bond he owned on June 1, 2001 had a face value of $1000, a discount yield of 10%, and it matured in one year (365 days). The exact discount price on June 1, 2001 was: (a) $900. (b) $909.09. (c) $910.00. (d) $990. (e) $991.11. 4. At a discount rate of 10%, the PV of the $200 Bernie Ebbers expects to receive two years from today upon his release from prison is: (a) $181.18. (b) $165.29. (c) $200. (d) $221.00. 5. Nice guy Ivan Boesky called his mom on April 15, 2001 to offer her Enron stock that he assured her would triple her money at the end of two years. However, Ivan’s mom wanted to know the actual rate of return per month. The monthly rate of return most consistent with Ivan’s projection is: (a) 5%. (b) 3%. (c) 4.68%. (d) 4.9%. (e) 4.23%. 6. Martha Stewart senses a need to double check her stockbroker’s calculations. She has a bond with 10 years to maturity, yield to maturity (YTM) of 9%, a face value of $1000, and a current price of $950. If the bonds make semi-annual payments, the coupon rate on Martha’s bonds is: (a) 8%. (b) 9%. (c) 9.3%. (d) 8.2%. (e) 10.1%. 7. Near-Magic bonds with face value of $1000 now sell for 95 percent of par value, have 11.5 years to maturity, and a YTM of 9 percent. The bonds pay interest semi- annually. The coupon rate on these bonds is: (a) 9%. (b) 8.5%. (c) 8.3%. (d) 4.5%. (e) 9.1%. 8. An investment project has an initial cost of $9000. It yields $5500, $5000, and $1000 at the end of the first, second, and third year. If the discount rate is 10%, the discounted payback period is: (a) 2 years. (b) 1.97 years. (c) 3 years. (d) 2.7 years. (e) 2.4 years. 9. You own an asset that had a total return last year of 9%. If the inflation rate was 4%, your real return on this asset was closest to: (a) 5.2%. (b) 6.5%. (c) 4.64%. (c) 3.9%. (e) 6.1%. [Hint: The cross-partial terms matter on this question.] 10. Suppose the retailing giant Everything You Want, Nothing You Need is selling an innovative new bond issue with scheduled payments of $2000 at the end of one year, $3000 in two years, $4000 in three years, and $7000 at the end of the fourth year. You’ve identified similarly risky investments that you expect would generate a 10% annual return. The most you would willingly pay for one of these bonds is: (a) $11,000. (b) $12,000. (c) $11,330.30. (d) $11,140.92. (e) $12,083.87. 11. What is the present value of the following cash flow at a 12% discount rate? (a) $351,221 (b) $450,000 (c) $493,440 (d) None of the above Year 1 Year 2 Year 3 $100,000 $150,000 $200,000