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1. You are considering buying a lottery which will give you two payments, one payment for...
2) If a security pays $110 in one year and $133 in three years, its present...
2) If a security pays $110 in one year and $133 in three years, its present value is $200 if the interest rate is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent. 7) The price of a coupon bond and the interest rate are ________ related; that is, as the interest rate ________, the price of the bond ________. A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls You...
Problem 4: Risk premium. Casey is considering buying a lottery ticket. The lottery pays $100 with...
Problem 4: Risk premium. Casey is considering buying a lottery ticket. The lottery pays $100 with probability and $0 with probability a) What is the "fair" price of the lottery ticket? In other words, what price of the lottery ticket provides the lottery owner an expected profit of zero? b) Suppose that a lottery ticket costs $15. If Casey is willing to buy the lottery ticket, what can we say about Casey's risk premium for this lottery? c) Suppose that...
You won the lottery, and can choose one of two (guaranteed) payments: Choice A pays $5,000,000...
You won the lottery, and can choose one of two (guaranteed) payments: Choice A pays $5,000,000 today; Choice B pays $350,000 at the end of the next 20 years (first payment is one year from today). A. If the discount rate is 5%, which option should you choose? B. If the discount rate is 2%, which option should you choose? C. At what discount rate would you be indifferent between these two choices? (Hint: When will the two choices have...
Suppose that you are considering the purchase of a coupon bond with a face value of...
Suppose that you are considering the purchase of a coupon bond with a face value of $1,000 that matures after four years. The coupon payments are 6 percent of the face value per year. a. How much would you be willing to pay for this bond if the market interest rate (that is, the best alternative investment option) is also 6 percent? b. Suppose that you have just purchased the bond, and suddenly the market interest rate falls to 5...
You are considering purchasing one of two assets. • Asset 1 has payments of 5,000 at...
You are considering purchasing one of two assets. • Asset 1 has payments of 5,000 at the end of year 1, 10,000 at the end of year 3, and 15,000 at the end of year 5. The price for Asset 1 today is 26,000. • Asset 2 has payments of 12,000 at the end of year 4 and 20,000 at the end of year 5. The price of the asset 3 years from now is 29,500. If the current spot...
,000 for 3. Suppo e it i" now 10years later, and wait tobaya-rest at 6% i You pay 810 the rest monthly) (a) Find the monthly payment years required to amorti b) How much total will you pay in...
,000 for 3. Suppo e it i" now 10years later, and wait tobaya-rest at 6% i You pay 810 the rest monthly) (a) Find the monthly payment years required to amorti b) How much total will you pay in interest for this loan? 4. Now suppose that instead of buying a house, you decided to rent one for less (and spend the $10,000 on a luxury vacation). You can use the monthly savings to deposit $500 at the end of...
You have won the lottery at the beginning o f this year. You have the option of...
You have won the lottery at the beginning o f this year. You have the option of receiving a lump sum payment (now) of $5,000 or receiving the cash over three years respectively: Year 1 $2,000; Year 2 $2,500; Year $3,000. You currently receive a risk-free rate of return of 3% in your high yield savings bank account. When considering the time value of money, what option is more valuable. Hint: Create a cash flow schedule for the yearly payments and compare against...
You have just won the lottery and you can choose between the following payout options. The...
You have just won the lottery and you can choose between the following payout options. The annual interest rate (EAR) is 10%. a) $100,000 right now and $60,000 every two years starting 3 years from now and ending 17 years from now (i.e., payments are at t = 0, t = 3, t = 5, … , t = 15, t = 17). b) $60,000 a year for 25 years with the first payment one year from today (i.e., payments...
(5) You are considering buying an office building. You estimate that you will receive $1,100 at...
(5) You are considering buying an office building. You estimate that you will receive $1,100 at the end of every month for 20 years as rent (triple net). You want to earn a 10% rate of return per year. (a) First assume building has no value at the end of 20 years). How much would you be willing to pay for the building; i.e. what is the worth today of the net rent to be received in the future? (b)...
Problem 4: Risk premium. Casey is considering buying a lottery ticket. The lottery pays $100 with probability and $0 with probability a) What is the "fair" price of the lottery ticket? In other words, what price of the lottery ticket provides the lottery owner an expected profit of zero? b) Suppose that a lottery ticket costs $15. If Casey is willing to buy the lottery ticket, what can we say about Casey's risk premium for this lottery? c) Suppose that...
You are considering purchasing one of two assets. • Asset 1 has payments of 5,000 at the end of year 1, 10,000 at the end of year 3, and 15,000 at the end of year 5. The price for Asset 1 today is 26,000. • Asset 2 has payments of 12,000 at the end of year 4 and 20,000 at the end of year 5. The price of the asset 3 years from now is 29,500. If the current spot...
,000 for 3. Suppo e it i" now 10years later, and wait tobaya-rest at 6% i You pay 810 the rest monthly) (a) Find the monthly payment years required to amorti b) How much total will you pay in interest for this loan? 4. Now suppose that instead of buying a house, you decided to rent one for less (and spend the $10,000 on a luxury vacation). You can use the monthly savings to deposit $500 at the end of...
(5) You are considering buying an office building. You estimate that you will receive $1,100 at the end of every month for 20 years as rent (triple net). You want to earn a 10% rate of return per year. (a) First assume building has no value at the end of 20 years). How much would you be willing to pay for the building; i.e. what is the worth today of the net rent to be received in the future? (b)...
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