FINANCIAL MARKET AND TIME VALUE

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FINANCIAL MARKET AND TIME VALUE August-2019

Task 1: Consider a typical individual who owns the following financial instruments: A life insurance policy for $250,000; a certificate of deposit for $10,000; homeowner's and auto insurance policies; $50,000 in a mutual fund, and $150,000 in her pension fund at work. Which of these are instruments used primarily as stores of value and which are being used to transfer risk?

Task 2: Explain why countries that have volatile inflation rates are likely to have high nominal interest rates?

Task 3: An individual is currently 30 years old, wants to work until the age of 65 and plans on dying at the age of 85. How much will the individual need to have saved by the time he or she is 65 if he or she plans on spending $40,000 per year while retired? You can assume the individual can earn an interest rate of 5.0%.

Task 4: If a borrower and a lender agree on a long-term loan at a nominal interest rate that is fixed over the duration of the loan, how will a higher-than-expected rate of inflation impact the parties if at all?

Task 5: Suppose a two-year coupon bond has payments of $40 and a face value of $800. The interest rate is 8%. Compute the present value of the coupon payments and the principal payment of the bond. What is the price of this bond?

Task 6: A bond offers a $40 coupon, has a face value of $1000, and 10 years to maturity. If the interest rate is 5.0%, what is the value of this bond?

Task 6: You are considering purchasing a home. You find one that you like but you realize that you will need to obtain a mortgage for $100,000. You can afford of paying annual payment of 8000$. The mortgage company presents you with two options: a 15-year mortgage at a 6.0% annual rate and a 30-year mortgage at a 6.5% annual rate. What will be the fixed annual payment for each mortgage? Which one you will choose?