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An investment costs $800 initially, then earns $300 in years 2, 3, and 4. The annual interest rate is 4%. Which of the following statements
An investment costs $800 initially, then earns $300 in years 2, 3, and 4. The annual interest rate is 4%. Which of the following statements about this investment is correct? | |||||||||
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You are considering buying a house. Your mortgage requires monthly payments of $2,500 for 360 months. The interest rate is fixed at 4%. What is the present discounted value of your mortgage? | |||||||||
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What is the option value of waiting? | |||||||||
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Adam has wealth of $40,000 as long as his business does not burn down. However, there is a 50% probability that his business will burn down and cause a $30,000 loss, leaving him with $10,000 of wealth. Adam's utility function is given by U = W0.5, where W is wealth. What is the maximum price that Adam would pay for full insurance that covers the potential $30,000 loss? [Hint: The maximum price equals the actuarially fair premium plus the risk premium.] | |||||||||
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