6.) Consider a call option with an exercise price of $20 which sells for $1.25. Draw the profit diagram for a long position in this option at option expiration. Be sure to label the maximum profit, maximum loss and break-even. (10 points)

7.) We discussed the financial crisis in class. Briefly explain how if the default of mortgage backed securities began the crisis, credit default swaps made things much worse.

(3-4 sentences)

8.) The real risk free rate is 3% and inflation is expected to be 2.5% for the coming year. According to the Fisher Formula, what should be the nominal risk free rate?

9.) One year ago you invested in a one-year risk-free debt security with a nominal rate of 6%. Inflation for the year turned out to be 3.3%. According to the Fisher Formula what was your real rate of return?

10.) Are junk bonds a bad investment? Why or why not? (2-3 sentences)