1. Barney Gumble is contemplating shopping for a new snowplow. The plow fees $20,000. With the plow, Barncy cxpccts to clcar $five,000 per ycar for six ycars. At the finish of that pcriod, the plow ill havc cndcd its valuable life and have no salvage worth Industry interest prices are six.% a. What is thc prescnt valuc of thc money flows Barncy cxpects to reccivc from this projcct? b. Really should he pursue this project? Briefly clarify two. Your very first process in your new job at an investment bank is to value a new stock situation. You count on the stock will spend a dividend of $two per share beginning 1 year following situation and that dividends will develop at three.% per year thereafter. The return on comparable stocks is five.five% a. What value would you assign to the stock? b. How substantially do you count on the value of the stock will enhance for the duration of the very first ycar? three. A faculty member in Art History discovers you are taking Monetary Economics and hires you to establish no matter if it would make sense for him to refinance his mortgage. (Understanding acquired in Monctary Economics pays off speedily.) Thc faculty mcmbcr not too long ago took out a $250,000 20-ycar fixed price mortgage to finance a residence acquire with a four.five% interest price and annual payments. Interest prices on 20-year fixed price mortgages have considering that declined to four.% What are the annual payments on the present four.five% mortgage? b. What would be the annual payments on a four.% mortgage? c. If thc expense of refinancing is S6,000, is it worthwhilc to refinancc to gct thc lowcr price? (If the mortgage is refinanced, the proceeds from a new four.% mortgage will be utilised to repay the original four.five% mortgage Assume the faculty member plans to reside in the residence for at least 20 years and does not strategy to spend the mortgagc off carly.) four. The yield to maturity on l-year zero-coupon bonds is at the moment 7%, the YTM on two-year zeros is eight%. The Government plans to issuc a two-ycar maturity coupon bond, paying coupons oncc per ycar with a coupon price of 9%. The face worth of the bond is $100 a. At what value will the bond scll? b. What will the yield to maturity on the bond be? (Hint: Use a monetary calculator to get the YTM) c. If the expectations theory of the yield curve is appropriate, what is the marketplace expectation of the value that the bond will sell for subsequent year? d·Recalculate your answer to (c) ifyou belicve in the liquidity preferencc theory and you think that the liquidity premium is 1%

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