Please type your answers clearly, and underline most important results. You need to show the steps you have taken to arrive at the answers. You are strongly recommended to type your answers, as scanned handwritten notes are hard to read. Illegible writing yields no credit 1. Suppose you are the agent for a baseball pitcher. Suppose he is offered the following contract by the New York Yankees: a signing bonus of $3,000,000 (to be received immediately), a first year's salary of $6,000,000 (to be received one year from today), a second year's salary of $7,000,000 (to be received two years from today), and a third year's salary of $8,000,000 (to be received three years from today). Suppose he is offered the following contracts by the San Francisco Giants: a signing bonus of $6,000,000, a first year's salary of $5,500,000, a second year's salary of $6,000,000, and a third year's salary of $6,000,000. If you believe the interest rate is 10%, which offer would you advise the pitcher to accept? Would your advice change if you believed the interest rate were 5%? 2. Suppose that your roommate wants to borrow money from you. He offers three repayment plans. According to plan A, you lend him $800 now, and he repays you $1000 in two years. According to plan B, you lend him $800 now, and he repays you $500 in one year, and another $500 in two years. According to Plan C, you lend him $800 now, and he repays you $900 in one year. Which plan do you prefer? (or equivalently, which plan gives you the highest yield to maturity?) 3. Compute the rate of returns from holding each of the bonds below from period t to t+1 given the following scenario: At period t, the yield to maturity is 20% and is expected to stay the same forever. However, the Fed unexpectedly reduces the interest rate. The yield to maturity becomes 10% at period t+1 and is expected to prevail forever. (Hint: You need to calculate the prices of bonds at period t and t+1.) 1 a. A consol with a yearly coupon payment of $200; b. A two-year coupon bond with a coupon rate of 20% and face value of $1000; c. A three-year coupon bond with a coupon rate of 20% and face value of $1000. 4. If the interest rate is 10%, what is the present value of a security that pays you $1,100 next year, $1,210 the year after, and $1,331 the year after that