1. For winning a gold medal in the 200 backstroke at the 1992 Barcelona Olympics, Martin Lopez-Zubero will be given $1 million by the Spanish government on his 50th birthday, in 2019. What was the present value of this $1 million in 1992, using a required return of 10%?

2. Series EE U.S. savings bonds are sold for half of their face value; for example, it costs $25 for a bond that will be worth $50 when it matures. The number of years until maturity is set to give a specified rate of return. The maturities on Series EE bonds issued between November 1982 and October 1986 were set to give a 7.5% return. The maturities on bonds issued after November of 1986 were set to give a 6% return. Were the maturities shortened or lengthened in November of 1986? Explain your reasoning. Why do you suppose savings bond interest rates were reduced in November of 1986?

3. A spring 1992 publication by Rensselaer Polytechnic Institute showed a "smart option" in which a student enrolling in the fall of 1992 could save $4,931 by prepaying four years of tuition in the fall of 1992 with an amount equal to four times the current $15,900 tuition. Explain why this "smart option" may not be so smart.

4. Peter Lynch, legendary manager of Fidelity's Magellan Fund, wrote that, "If a company buys back half its shares and its overall earnings stay the same, the earnings per share have just doubled."
   a. Why don't all companies follow this advice and buy back half their shares?
   b. Why don't all companies double their earnings per share by declaring 1-for-2 stock splits?

5. In 1992 it was reported that a "Ban the Bond" posse, which included some of Bill Clinton's closest financial-market advisors, wanted the U.S. government to stop issuing long-term bonds and thereby reduce the federal deficit: "the approximately $40 billion a year that the U.S. Treasury now raises through 30-year bonds should be borrowed at shorter terms--say, between one and 10 years, where rates are lower." [Tom Petruno, "Easy Deficit Cure: Shift U.S. Debt to Shorter Bonds," The Los Angeles Times, September 30, 1992.]
   Why might such a shift not, in fact, reduce the federal deficit in the long run?

6. Explaining the rise in art prices to dizzying heights in the 1980s, a New York dealer said "Many purchases had been made with Japanese clients in mind." [quoted in Ann E. Berman, "Reality Check at the Auction Block," The Wall Street Journal, November 26, 1991.] Would John Burr Williams classify such purchases as investment or speculation? Explain your reasoning.

7. In early 1990, it was reported that tax experts at the U.S. Treasury were working on a plan that would allow corporations to deduct dividends from their taxable income, with one objective being to discourage leveraged buyouts. Explain their reasoning.

8. An October 1992 article in The Wall Street Journal gave the following advice on paying off a mortgage early: "Another way to look at it: An 8% mortgage actually costs someone with a 31% tax bracket about X%. So someone would have to be able to make more than X% after tax to beat the "return" from simply paying down the mortgage." Explain the reasoning behind The Wall Street Journal's rule of thumb. What is the value of X that has been omitted from this quotation?    

9. The article cited in the previous exercise goes on to advise that, "Paying off the mortgage can also be safer than buying even supersafe Treasury bonds, says Steven Enright, a River Vale, N.J., financial planner. While the value of the bonds will drop if interest rates go up, as he expects in 1993, 'you don’t have that risk if you are paying down your mortgage.'" Explain why you either agree or disagree with this advice.

10. After the Dow Jones Industrial Average declined by 120 points on Friday, November 15, 1991, PaineWebber's portfolio strategist recommended that investors buy more stocks, explaining "There is no alternative. This is a need-driven market. People need an alternative to a 4 1/2% CD. The only place they're going to find it is in dividend-paying stocks with the capacity to increase dividends every year." At the time, stock dividend yields averaged 3% and interest rates averaged 4.5% on 3-month Treasury bills and certificates of deposits (CDs); 8% on long-term Treasury bonds; 8.5% on long-term corporate bonds; and 7% on long-term municipal bonds. Write a paragraph rebutting his advice.