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  • Problem Set 1

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    James Milner
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    Problem Set #1 is due on March 25, 2011. Students should submit their solutions in class, via email, or by bringing them to the instructor's office by 9:30 AM that day. The problem set contains 6 questions - the first asks students to explain how their willingness to buy Vodafone stock would change in 5 situations, the second asks students to calculate the yield to maturity on a discount bond, and the third asks whether people are more or less likely to buy houses if mortgage rates rise but expected housing price increases also rise.

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    Problem Set #1 is due on March 25, 2011. Students should submit their solutions in class, via email, or by bringing them to the instructor's office by 9:30 AM that day. The problem set contains 6 questions - the first asks students to explain how their willingness to buy Vodafone stock would change in 5 situations, the second asks students to calculate the yield to maturity on a discount bond, and the third asks whether people are more or less likely to buy houses if mortgage rates rise but expected housing price increases also rise.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
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    123 views1 page

    Problem Set 1

    Uploaded by

    James Milner
    Problem Set #1 is due on March 25, 2011. Students should submit their solutions in class, via email, or by bringing them to the instructor's office by 9:30 AM that day. The problem set contains 6 questions - the first asks students to explain how their willingness to buy Vodafone stock would change in 5 situations, the second asks students to calculate the yield to maturity on a discount bond, and the third asks whether people are more or less likely to buy houses if mortgage rates rise but expected housing price increases also rise.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 1

    Problem Set #1

    (due to 25/03/2011)

    Please hand in your solutions on March 25 in class, or send them by email


    (sergun@metu.edu.tr) or bring them to my office until 09:30 of the before mentioned
    day.

    1. (35 points) Explain why you would be more or less willing to buy a share of Vodafone
    stock in the following situations:

    a. Your wealth falls.


    b. You expect the stock to appreciate in value.
    c. The bond market becomes more liquid.
    d. You expect gold to appreciate in value.
    e. Prices in the bond market become more volatile.

    2. (20 points) What is the yield to maturity on a $1000-face-value discount bond


    maturing in one year that sells for $800?

    3. (15 points) 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?

    4. (10 points) Rank the following assets from most liquid to least liquid: a. Checking account
    deposits b. Houses c. Currency d. Washing machines e. Savings deposits f. common stock

    5. (10 points) If you are an employer, what kinds of moral hazard problems might you worry
    about with your employees?

    6. (10 points) If you suspect that a company will go bankrupt next year, which would you
    rather hold, bonds issued by the company or equities issued by the company? Why?

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