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Financial Economics

1. What is the payment on a 12‐year, $400,000 mortgage that compounds on the payment date every 73 days at 6%? (show your formula and calculations, and ignore leap year).

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2. Explain the difference between the yield on a bond and the rate of return on a bond.

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3.You forecast that the yield curve will steepen in the near future. It may be a fall in short-term rates, a rise in long-term rates, or some combination. What strategy should you implement in the bond market to position yourself for a profit?

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4. Suppose that the S&P 500 currently has a P/E ratio of 20. How would you value a manufacturing company with $10M of earnings?

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5. Define and explain duration and convexity.

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6. Your trading desk is long $500 million in the long bond. How can you limit your exposure to only $250 million?

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7. In a casino game, you toss a fair coin now. Heads: you win. Tails: you lose. If you win, you get $10 in exactly one year. If you lose, the casino takes $5 from  you immediately. The one-year interest rate is 5%. How much should you pay to play this game?

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