1.

a. You deposit $5,000 into a bank account earning 1.1% per year, compounded annually, and leave it there untouched. What will be the future value of your account after three years of compounding? b. What is the market yield-to-maturity for a 1-year T-bill that has a current market price of $9,800 and a face value of $10,000? (yield-to-maturity = interest rate) c. What is the current market price of a 1-year German T-bill that has a face value of 10,000 and a market yield-to-maturity of -0.2%? d. A 3-year bond with a $10,000 face value and 1% annual coupon payments has a current market yield of 2.2%. What is its present value (assume that the first coupon is due one year from today)? e. What is the present value of a consol bond with a coupon payment of $1,000 and a yield-to-maturity of 8.00%?

Hints: FV = PV (1+i)n PV = FV / (1+i)n = (1 + )1 + (1 + )2 + (+ ) (1 + )3 PV of a perpetuity = C/i

2) (20 pts.) Joe the dropout can buy a car today for $5,000 that will provide $10,000 in income next year since it will enable him to get a job. Joe does not have enough money to buy it right now and will need to get a loan. However, since Joe is, well, a dropout, the only lender willing to give him a loan is Larry the Loan Shark. The best terms Larry will offer Joe is a one-year $5,000 loan with a single 90% coupon payment. If Joe doesn't get the car, he will have no job and will earn $0 next year. Assuming that Joe prefers to have something versus nothing, should he take the loan to buy the car? Why or why not?