ECN 481, Assignment #2

(Due on date and time specified in course syllabus)

Note that you do not need to look up any additional historical information – all the information that you need is contained in the questions themselves.

1. Suppose that an NFL player’s football contract is published as $35 million for 5 years. More specifically, he is paid by the team $7 million per year for 5 years.Given these annual payments along with an interest rate equal to 8 percent, set up how you would compute the value of his contract(1 point).

2. Set up the formula for computing the monthly loan payments for a 15 year mortgage of $100000 taken out at 6% (1 point).

3. Suppose that a 20 year Corporate Bond pays an annual interest payment of $60. The bond sold for $1000 last year and is currently valued at $1050.Compute the rate of return, based on the formula from the class. Briefly discuss the role of the capital gain or capital loss in your result(2 points)

4. Compute the yield to maturity on a $10000 face value T-Bill which has 38 days to maturity and sells for $9940 on the secondary market.(1 point)

5. Suppose that CNN headline news reports that a bond price has "plunged" (i.e. decreased) due to expectations of increased inflation.  What does this imply about the corresponding bond’s interest rate? Providing the definition of the yield to maturity (YTM) that we use in class and then applying this definition of the YTM to this problem, briefly explain why the bond’s interest rate changed in this way.(3 points)

6. Suppose that the Federal government increases its debt. Providing a graph of the demand and supply for bonds (you may draw the graph by hand), show the effect on the equilibrium interest rate.Provide an appropriate specific bond to which this would pertain(3 points).

7. Suppose that the market risk, or volatility, of stocks increases. Providing a graph of the demand and supply of bonds (you may draw the graph by hand), show the effect of this behavior on the equilibrium interest rate as a result.Name another variable other than in question 5, including the correct direction of change (i.e.increase or decrease) that would be described by the same graph (3 points).

8. Go to the Federal Reserve Economic Database (FRED) website (http://fred.stlouisfed.org). Find a variable that we’ve covered in class under the heading “Monetary Data” (“Monetary Data” on FRED is within the Category “Money, Banking, and Finance”) other than the M1 or M2 money stock, the Federal Funds rate, or the 3 month Treasury Bill rate. Provide an explicit definition of this variable and download a graph of it over time from FRED. Provide one observation regarding how this variable has behaved over time (3 points).