1.You have just renegotiated the interest rate of your home mortgage loan. (This is called rate modification.) The original loan of $500,000 carries an interest rate is 7% has an original maturity of 15 years and requires monthly payments (end of month). There are 80 months remaining to repay the loan. The new mortgage has a lower rate of 6% and will still have 80 months left to maturity. The lender requires a $2,500 “rate modification” fee. First estimate the monthly savings if you switch to the new lower interest rate and then the net gain or loss in present value dollars today if you go through with this rate modification deal. (To find the net gain (loss) apply the new interest rate.)
ANSWER: Net Gain___________________; Net Loss________________
2.You have an investment capital of $1,000,000. You plan to invest a portion of this money in Treasury bonds and the remainder in a stock portfolio. Treasury bonds are expected to yield 4% per year whereas the stock portfolio is expected to return 8% per year. Your goal is to achieve an overall portfolio return of 5% on your total investment of $1,000,000. Show the dollar amount you will invest in Treasury bonds.
ANSWER: __________________________________
3.You know that Treasury bills have a beta of 0 because they are risk-free. A portfolio of technology stocks has a beta of 2. You plan to invest 40% of your investment capital in Treasury bills and the remaining in the technology stock portfolio. Additionally you know that the risk-free rate is 5% and the market risk premium is 7.5%. Estimate the average beta of your investment in the T-Bills and the technology stock portfolio and then the expected rate of return you should earn on this portfolio.
ANSWER: Exp. Rate of Return: __________________
4.In January 2009 you bought a German stock portfolio for 5,000,000 Euros and sold it in December 2009 for 3,000,000 Euros. Over the same period the dollar’s exchange rate in Euros moved from $1.25 per EU to $1.38 per EU. Estimate the dollar-equivalent or adjusted rate of return you realized on this German stock portfolio.
ANSWER: Dollar Equivalent (or adjusted) Rate of Return: _________________
5.In January 2009 your firm bought from an Italian firm goods payable in Euros worth EU2,000,000. Suppose that at that time the exchange rate of the Euros was 1EU=$1.25. Because this was a sale on credit, you must pay this bill in January 2010 when the Euro was worth about $1.38. How much money in dollars have you lost or gained from this purchase on credit?
ANSWER: LOSS $_____________________; GAIN $_________________________
ANSWER: Net Gain___________________; Net Loss________________
2.You have an investment capital of $1,000,000. You plan to invest a portion of this money in Treasury bonds and the remainder in a stock portfolio. Treasury bonds are expected to yield 4% per year whereas the stock portfolio is expected to return 8% per year. Your goal is to achieve an overall portfolio return of 5% on your total investment of $1,000,000. Show the dollar amount you will invest in Treasury bonds.
ANSWER: __________________________________
3.You know that Treasury bills have a beta of 0 because they are risk-free. A portfolio of technology stocks has a beta of 2. You plan to invest 40% of your investment capital in Treasury bills and the remaining in the technology stock portfolio. Additionally you know that the risk-free rate is 5% and the market risk premium is 7.5%. Estimate the average beta of your investment in the T-Bills and the technology stock portfolio and then the expected rate of return you should earn on this portfolio.
ANSWER: Exp. Rate of Return: __________________
4.In January 2009 you bought a German stock portfolio for 5,000,000 Euros and sold it in December 2009 for 3,000,000 Euros. Over the same period the dollar’s exchange rate in Euros moved from $1.25 per EU to $1.38 per EU. Estimate the dollar-equivalent or adjusted rate of return you realized on this German stock portfolio.
ANSWER: Dollar Equivalent (or adjusted) Rate of Return: _________________
5.In January 2009 your firm bought from an Italian firm goods payable in Euros worth EU2,000,000. Suppose that at that time the exchange rate of the Euros was 1EU=$1.25. Because this was a sale on credit, you must pay this bill in January 2010 when the Euro was worth about $1.38. How much money in dollars have you lost or gained from this purchase on credit?
ANSWER: LOSS $_____________________; GAIN $_________________________