It isn’t ten million, but I’ll take it!! 3. Consider a bond with a 7% annual coupon and a face value of $1 ,OHO. Complete the following table: On page 39 and 40 we are given an example off bond with a coupon rate of 10%. It pays you 100 per year for ten years and the final payment will be 1100 when It pays back Its face value. Using this same formula the bond In this problem will pay 70 per current pricing. In example 3. N page 43 to solve this problem I used the Coupon Bond Formula and plugged it in to my pad Mini app that I purchased while I was listening to your lecture. It was 14. 99 but well worth it!! N= years to maturity, Iv’= face value of the bond, annual interest rate, and MAT = yearly coupon payment. Then CAP IV and you have your current price. Years to Maturity Yield to Maturity Face Value. 3 1000. 00 5 1054. 46 3 7 What relationship do you observe between maturity and discount rate and current price? It seems that these things have an inverse relationship like you mentioned in our lecture.
If YET is below the coupon rate, the price is more than the face value, and vice versa. Also when the YET is the same as the coupon, it is worth exactly the face value, regardless of maturity. Interesting information! 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? While this answer should technically be yes, I am not sure that this would actually be the case. I worked in Consumer Finance for 10 years, 5 of which were spent in direct mortgage lending.
For 5 years after that I was an onsite sales consultant for DRY Horton homes. I got laid off after Bear Sterns collapsed and the economy tanked and with the credit markets frozen, you had to have over 700 scores and a chunk of money down to obtain financing. The no proof of income/asset loans were gone forever, and supreme was impossible to get financed. It was at this point I decided to go back to school and finish my degree, and now at 42 years old I am about to become the first Overstress to graduate college!! I was the one that told you I may go get a masters in finance and go in to banking.
With all of this real world experience in mind, it seems like a no brainier to purchase a home because ultimately the 5% loan would be 3 percent because of the offset in increased value of the home , and the 10% would end up being a one percent mortgage. However, the consumer purchasing a home will have a very hard time comprehending this as fact, and would likely believe this is a sales tactic, and would object that there is no guarantee that their particular home would be guaranteed to increase by these amounts, and they would be right.
Rate has a direct relation with payments on mortgages and the 10 recent rate would price people out of their payment range, and rates that high at this point would bring the housing market to a halt, and I doubt home prices could increase with sales stalled. For these reasons I can only offer you this mixed answer, although I understand the concept the book is trying to point out. 9. A 10-year, 7% coupon bond with a face value of $1,000 is currently selling for The rate of return formula is example 3. 7 in the text on page 51. R = c/p, + apt+l-apt/apt. With that formula you plug 70+880. 10-871. 65/871. 65 = 0. 900017 or 9%. Chapter 4 Questions (POP): Z 4, 10 2. Explain why you would be more or less willing to buy a house under the following circumstances: A. You Just inherited $100,000. More likely, because I would have enough money for a down payment, and other moving related expenses. It also helps me retain wealth moving the money from liquid cash to real estate. B. Real estate commissions fall from 6% of the sales price to 4% of the sales price. More likely is the answer you are looking for but realistically this wouldn’t influence me personally because I know enough realtors to get a discount on listings/ researches.
Realtor commission is something that can always be negotiated, if not find another realtor. The appraiser and inspector do the most important work anyway. C. You expect Polaroid stock to double in value next year. Less because Polaroid stock offers a better return on investment is the correct answer, but based on today’s market I wouldn’t touch Polaroid, an igloo in Texas is probably a better investment than Polaroid. D. You expect housing prices to fall. Less because its expected return has fallen. Less likely, if prices are falling it would be deter to watch the market and try and determine when prices level out and start increasing again.
E. Prices in the stock market become more volatile. More likely because housing would likely be less volatile if the market becomes unstable. 4. I own a professional football team, and I plan to diversify in either a company that owns a professional basketball team or a pharmaceutical company. Which of these two investments is more likely to reduce the overall risk I face? Why? Most of the information I have read regarding investments promote diversification in order to educe being over exposed to any particular market segment.
Having both a pro football and basketball team is a tremendous amount of capital all in one market segment. Tom Benson the owner of the New Orleans Saints as well as the pro basketball team New Orleans Hornets/Pelicans is a rare exception of someone owning more than one team. The pharmaceutical investment would be the more 10. How might a sudden increase in people’s expectations of future real estate prices affect interest rates? If real estate were to increase in value it is likely interest rates would rise because demand for financing would be high.
If investors feel that real estate is better than the bond or stock market you would also so increased investment in Reedit’s as well. I think we are a long way from this happening and I think in today’s market cheap money has more to do with increased home sales than forecasted housing price increases. Quant Problems (pop): 1, 5 1 . You own a $1 ,OHO-par zero-coupon bond that has five years of remaining maturity. You plan on selling the bond in one year, and believe that the yield to maturity next year will have the following probability distribution Probability Required Yield