Question one.

QUESTION 1 A client of yours wants to purchase a vacation home in Avalon Park, Florida in twenty years time for cash. The house is currently valued at $200,000 and the price is expected to rise on average at 3% per year for the full period. In order to buy that house in 20 years time your client asked you to estimate her monthly end-of-month equal payments required so when the time has expired she could buy the house for cash. You have found an ordinary annuity investment that could earn her 9% compounded. Answer this question and Question 2, which requires the same information from this question (#1). 1. The value of the house in 20 years would be closest to: a. $212,000

b. $ $361,223

c. $461,223 d. $412,180 10

QUESTION 2 The information from question is repeated for your convenience. A client of yours wants to purchase a vacation home in Avalon Park, Florida in twenty years time for cash. The house is currently valued at $200,000 and the price is expected to rise on average at 3% per year for the full period. In order to buy that house in 20 years time your client asked you to estimate her monthly payments required so when the time has expired she could buy the house for cash. You have found an annuity investment that could earn her 9% compounded. Question 2 uses the same simulation as in question 1. 2. The monthly amount to set aside each month starting from the end of the first month of the 20-year period would be closest to (round to the nearest dollar): a. $547 b. $541 c. $126 d. $833

QUESTION 3 3. At a given expected rate of return, the ____________ the standard deviation, the ___________ the investment. a. smaller, larger the expected return on b. larger, riskier c. smaller, riskier d. larger, smaller the expected return on

QUESTION 4 4. The risk premium for an individual security is equal to the a. beta times the market return b. difference between the required return and the risk free rate c. weighted average of the individual security betas in a portfolio d. the security's covariance divided by the variance of the market

QUESTION 5 An investor holds a Google common stock, which is paid a dividend of $5.00 last quarter. The company has a corporation's expected growth rate (g) of 10% and the stock currently sells for $110. If an investor requires a rate of return of 15% then, as discussed in class, that investor should [Vc = D0(1+g)/ (rc - g) = D1/ (1+g)/ (rc - g)] a. hold, that is neither buy nor sell as there is no gain or loss at the current market price b. buy more of the Google stock c. insufficient information given for a decision d. sell the Google stock

QUESTION 6 The market price of a 10-year $1000 ten percent (10%) coupon paying bond currently sells for $1,070. If a customer is an investor who buy ]s and sells and she given her requires a 9% return on the bond then based her intrinsic value she would a. hold the bond that is neither but nor sell b. buy the bond c. sell the bond d Insufficient information given

QUESTION 7 The following refers to questions 7 to 9: Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now (Risk = Square root of the variance): Situation Rate of Return (ri) Probability Exp Ret ( ri - r~)2 (Pi) I -20% 0.25 II 0% 0.30 III +20% 0.25 IV +40% 0.20 r~ = ____% Variance = Risk = ____% Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock. a.. 40% b. 0% c.. 10% d. 8%

QUESTION 8 Phoenix stock one year from now (Risk = Square root of the variance): Situation Rate of Return (ri) Probability Exp Ret ( ri - r~)2 (Pi) I -20% 0.25 II 0% 0.30 III +20% 0.25 IV +40% 0.20 r~ = ____% Variance = ______% Risk = ______% ........./Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the risk in % associated with the Phoenix Stock Choose the closest to your computations a 4.6% b 20.9% c 16.7% d 21.4%

QUESTION 9 Note that the calculations were done in the previous two questions and the table is reproduces again Situation Rate of Return (ri) Probability Exp Ret ( ri - r~)2 (Pi) I -20% 0.25 II 0% 0.30 III +20% 0.25 IV +40% 0.20 r~ = ==== Variance = Risk = ===== ...... From the data calculated in the previous two questions and the table repeated here (above) there is a 16% chance that the investor could earn a.. As low as 8 % or as high as 29.4% b.. As low as -13.4% or as high as 29.4% c.. As low as 0% or as high as8% d.. As low as -24.8% or as high as 34%

QUESTION 10 ............Assume that DuPont Company of Delaware pays an annual year-end dividends of $4.50 on its series B cumulative preferred stock (recall that a preferred stock is like a perpetual bond). What is the value of this stock in dollar terms to an investor who is requiring an 8% annual rate of return on this investment? a. $4.66 b.. $16.24 c. $56.25 d. $59.60%

QUESTION 11 You are seeking to buy a brand new truck for a health care facility at the list price of $50,000. To obtain a loan the lender requires a down payment of 10% and an interest rate of 8% with the borrowed amount the be repaid at the end of each quarterly period in equal amounts comprising principal and interest. Assuming the loan amount is amortized over a 5-year period then, rounding to the closes dollar, your quarterly repayment amount is closest to: a. $2,752 b. $5,635 c. $5,800 d. $2,500 e. None of the above a. $2,752 b. $5,635 c. $5,800 d. $2,500 e. None of the above

QUESTION 12 We had a brief discussion at our last class as some of your colleagues discuss unsystematic and systematic risks and references were made to Chapter 8 in the e-text. From our brief discussion and Chapter 8 in the e-text, which of the following response (s) is/are correct? I. Unsystematic risk can be eliminated through diversification. II. Unsystematic risk is the relevant portion of an asset's risk attributable to market factors that affect all firms, like inflation, political events, etc. a. Only statement II is correct b. Only statement I is correct c. Both statements I and II are correct d. Both statements I and I are false.

Part two.

Answer the following questions.

Exercise 3.3 (An Anticipated Output Shock I) Consider a two-period small open endowment economy populated by a large number of households with preferences described by the lifetime utility function where Ci and C2 denote, respectively, consumption in periods 1 and 2. Suppose that households receive exogenous endowments of goods given by Q1 = Q2 = 10 in periods 1 and 2, respectively. Every household enters period 1 with some debt, denoted B;, inherited from the past. Let By be equal to -5. The interest rate on these liabilities, denoted ro, is 20 percent. Finally, suppose that the country enjoys free capital mobility and that the world interest rate on assets held between periods 1 and 2, denoted r*, is 10 percent. 1. Compute the equilibrium levels of consumption, the trade balance, and the current account in periods 1 and 2. 2. Assume now that the endowment in period 2 is expected to increase from 10 to 15. Calculate the effect of this anticipated output increase on consumption, the trade balance, and the current account in both periods. Provide intuition.Consider a twoperiod small open economy populated by a large number of households with preferences described by the lifetime utility function Inwfbf") + 111(ch 03' ) where C? and ng , for t : 1, 2, denote consumption of tradable and nontradable goods in period t, respectively. Households are endowed with if : 1 and Q; = 2 units of tradables and Q? : Q? : 1 units of nontrad- ables in periods 1 and 2. Households start period 1 with no assets or debts. The world interest rate is zero. 1. Calculate the equilibrium levels of the current account and the rel ative price of nontradables in terms of tradables in period 1, denoted CA1 and 391, respectively. 2. Suppose now that suddenly the world interest rate increases from 0 to 10 percent. Calculate the new equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1