SCHOOL OF ECONOMICS AND POLITICAL SCIENCES DEPARTMENT OF

ECONOMICS

COURSE: MANAGERIAL ECONOMICS

2ND RESEARCH ASSIGNMENT

NAME: BRATU CARINA-MARIA

DEPARTMENT: BUSINESS ADMINISTRATION

1st Subject

1a) A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which
of these statements is CORRECT?

Answer: c.The proportion of each payment that represents interest as opposed to repayment
of principal would be lower if the interest rate were lower.

Explanation: a, d, and e can be ruled out as incorrect by simple reasoning. b is also incorrect
because interest in the first year would be Loan amount * interest rate regardless of the life of
the loan, so the interest payment would be identical for the first payment.Think about the
situation where r = 0%, statement c is the most logical statement. One could also set up an
amortization schedule and change the numbers to confirm that only c is correct.

1b) Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate
mortgage is CORRECT? (Ignore taxes and transactions costs.)

Answer: b. Because it is a fixed-rate mortgage, the monthly loan payments (which include
both interest and principal payments)are constant

Explanation: A fixed-rate mortgage is a home loan option with a specific interest rate for the
entire term of the loan. Essentially, the interest rate on the mortgage will not change over the
lifetime of the loan and the borrower's interest and principal payments will remain the same
each month
2nd Subject

Which of the following statements regarding a 30-year monthly payment amortized mortgage

with a nominal interest rate of 10% is CORRECT?

Answer: b. A smaller proportion of the last monthly payment will be interest, and a larger
proportion will be principal, than for the first monthly payment

3rd Subject

Which of the following bank accounts has the highest effective annual return?

Answer: e.An account that pays 8% nominal interest with daily (365-day) compounding

4th Subject

You want to go to Europe 5 years from now, and you can save $3.800 per year, beginning
one year from today. You plan to deposit the funds in a mutual fund that you think will return
8,5% per year. Under these conditions, how much would you have just after you make the 5th
deposit, 5 years from now?

Answer: e. $22.516,42

5th Subject
You have a chance to buy an annuity that pays $2.450 at the beginning of each year for 3
years. You could earn 5,5% on your money in other investments with equal risk. What is the
most you should pay for the annuity?

Answer: a. $6,973.48

6th Subject

Morin Company's bonds mature in 8 years, have a par value of $1.000, and make an annual
coupon interest payment of $65. The market requires an interest rate of 6,1% on these bonds.
What is the bond's price?

Answer: a. $1.024,74

7th Subject

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual

coupon rate of 9,5%. The bond has a face value of $1.000, and it makes semi-annual interest

payments. If you require an 10,7% nominal yield to maturity on this investment, what is the

maximum price you should be willing to pay for the bond?

Answer: c. $901,80

8th Subject

O'Brien Ltd.'s outstanding bonds have a $1.000 par value, and they mature in 25 years. Their

nominal annual, not semi-annual yield to maturity is 9,25%, they pay interest semi-annually,
and they sell at a price of $875. What is the bond's nominal coupon interest rate?
Answer: c. 7,96%

9th Subject (10%)

Assume that you hold a well-diversified portfolio that has an expected return of 11,0% and a
beta of 1,20. You are in the process of buying 1.000 shares of Alpha Corp at $10 a share and
adding it to your portfolio. Alpha has an expected return of 21,5% and a beta of 1,70. The
total value of your current portfolio is $90.000. What will the expected return and beta on the
portfolio be after the purchase of the Alpha stock? Do not round your intermediate
calculations.
Answer: d. 12,05%; 1,25

10th Subject
Jill Angel holds a $200.000 portfolio consisting of the following stocks. The portfolio's beta
is 0,88.
Stock Investment Beta
A $50.000 0,50
B $50.000 0,80
C $50.000 1,00
D $50.000 1,20
Total $200.000

If Jill replaces Stock A with another stock, E, which has a beta of 1,45, what will the
portfolio's new beta be? Do not round your intermediate calculations.
Answer: e. 1,11