Question 1 (50 points): Refinancing a mortgage You purchased a home (Z+2) years ago for $200,000 and borrowed the entire amount from Broadway Bank at an APR of 6% with monthly payments. The original maturity of your mortgage was (30+X) years. a. (20 points) Draw a time line that depicts the cash flows from the mortgage payments from when you bought your home. Compute the outstanding mortgage amount today. i. Show the time line with the balance today, and ii. Give the inputs to your computations for full credit. b. (30 points) The financial crisis has reduced mortgage rates. Suppose you refinance your mortgage today with a mortgage maturity equal to the remaining time on your current mortgage at an APR of 3% and monthly payments. What is the present value of your savings if refinancing will incur closing costs of $2500? Question 3 (50 points): Systematic Risk and the Capital Asset Pricing Model (Please write 5 lines or so for each response) a. (10 points) Suppose Moderna COVID vaccine is approved and it is announced today in the morning at 9AM. According to the efficient market hypothesis, should the price of Moderna stock adjust right away? Why? Under what conditions might it adjust slowly over time? b. (10 points) Explain in your own words the meaning of systematic risk and unsystematic risk? Provide an example of each type of risk. c. (20 points) Why is there is less unsystematic risk in a portfolio with many stocks- Explain why and how unsystematic risk gets diversified away? d. (10 points) What is the typical annual volatility or standard deviation of annual returns (%) of a large capitalization stock (e.g., a Dow 30 stock)? How much of that total volatility can be attributed to the market and to unsystematic risk? Question 1 (50 points): Refinancing a mortgage You purchased a home (Z+2) years ago for $200,000 and borrowed the entire amount from Broadway Bank at an APR of 6% with monthly payments. The original maturity of your mortgage was (30+X) years. a. (20 points) Draw a time line that depicts the cash flows from the mortgage payments from when you bought your home. Compute the outstanding mortgage amount today. i. Show the time line with the balance today, and ii. Give the inputs to your computations for full credit. b. (30 points) The financial crisis has reduced mortgage rates. Suppose you refinance your mortgage today with a mortgage maturity equal to the remaining time on your current mortgage at an APR of 3% and monthly payments. What is the present value of your savings if refinancing will incur closing costs of $2500? Question 3 (50 points): Systematic Risk and the Capital Asset Pricing Model (Please write 5 lines or so for each response) a. (10 points) Suppose Moderna COVID vaccine is approved and it is announced today in the morning at 9AM. According to the efficient market hypothesis, should the price of Moderna stock adjust right away? Why? Under what conditions might it adjust slowly over time? b. (10 points) Explain in your own words the meaning of systematic risk and unsystematic risk? Provide an example of each type of risk. c. (20 points) Why is there is less unsystematic risk in a portfolio with many stocks- Explain why and how unsystematic risk gets diversified away? d. (10 points) What is the typical annual volatility or standard deviation of annual returns (%) of a large capitalization stock (e.g., a Dow 30 stock)? How much of that total volatility can be attributed to the market and to unsystematic risk
