Please answer all the questions below! total 6 questions

4. If mortgage rates rise from 5\% to 10\%, but the expected rate of increase in housing prices rises from 2\% to 9\%, are people more or less likely to buy houses?

1. A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first pay- ment is made immediately, what is this grand prize really worth? Use an interest rate of 6\%.

10. You have paid $980.30 for an 8\% coupon bond with a face value of $1,000 that matures in five years. You plan on holding the bond for one year. If you want to earn a 9\% rate of return on this investment, what price must you sell the bond for? Is this realistic? 11. Calculate the duration of a $1,000, 6\% coupon bond with three years to maturity. Assume that all market interest rates are 7\%. 1. Explain why you would be more or less willing to buy a house under the following circumstances: a. You just inherited $100,000.

b. Real estate commissions fall from 6\% of the sales

price to 4\% of the sales price.

c. You expect Polaroid stock to double in value next year.

d. Prices in the stock market become more volatile.

e. You expect housing prices to fall.

2. Consider a $1,000-par junk bond paying a 12\% annual coupon with two years to maturity. The issuing com- pany has a 20\% chance of defaulting this year, in which case the bond would not pay anything. If the company survives the first year, paying the annual coupon payment, it then has a 25\% chance of default- ing in the second year. If the company defaults in the second year, neither the final coupon payment nor par value of the bond will be paid. a. What price must investors pay for this bond to expect a 10\% yield to maturity?

b. At that price, what is the expected holding period return and standard deviation of returns? Assume that periodic cash flows are reinvested at 10\%. 4. An economist has concluded that, near the point of equilibrium, the demand curve and supply curve for one-year discount bonds can be estimated using the following equations: Bd: Price = – 2 Quantity + 940 5 Bs: Price = Quantity + 500

a. What is the expected equilibrium price and quan- tity of bonds in this market? b. Given your answer to part (a), which is the expected interest rate in this market?

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