1 The owner of a Washington, D.C. real estate firm wrote that an equation basic to real estate is:

Principal x Interest Rate per Period x Interest Periods (time) = Total Interest Paid

2 Roger Lowenstein, "Valuing Gold--or Stocks--From a Desert Isle," The Wall Street Journal, July 10, 1997:

Suppose, for a second, that two traders on a desert island had access to every statistic and piece of information in the world economy, except for the price of gold and of other precious metals. If asked to estimate the price of gold, they wouldn’t have the slightest clue....But equities are different. Two shipwrecked security analysts, stocked with information but isolated from the chatter of Wall Street, could put reasonable values on most stock prices most of the time.

3 Bonds can be bought on margin--30 percent for corporate bonds and as little as 5 percent for Treasury bonds. Why would anyone buy Treasury bonds on margin, since the loan rate charged by brokers is presumably higher than the interest rate on Treasury bonds?

4 In 1987, Rosalind Setchfield won $1,305,535.80 in Arizona's state lottery, an amount she was to be paid in 20 annual installments of $65,276.79. In 1995, she sold half of her next 9 prize checks to a lottery broker for $140,000; the broker resold the rights to these 9 checks to a large financial institution for $196,000. The first of these annual prize checks would be paid 10 months after the sale. If you were a financial analyst employed by this financial institution, how would you determine whether $196,000 was an attractive price? Be very specific.

5 In 1986, The Wall Street Journal reported that, "Falling interest rates prompt corporations to refinance short-term, high-cost debt with bonds with lower rates and longer maturities, reducing costs and making them less vulnerable to interest-rate moves." Why might long-term debt have lower interest rates than short-term debt? In what way are those who borrow long-term still vulnerable to interest rate moves?

6 Why do the stocks of financially shaky companies tend to sell at relatively low P/Es? Shouldn't these stocks command a risk premium?

7 "I bought XXX stock because it is the largest advertising agency in the world and its stock was selling for only $2 a share." Give two distinct and quite different reasons why the fundamental value of shares of the largest advertising agency in the world could be only $2 a share, when the fundamental values of shares of smaller advertising agencies are more than $20 a share.

8 In 1986, the managing director of the Bond Portfolio Analysis Group at Salomon Brothers argued that the duration of a portfolio of bonds and stocks may be much greater than the duration of the bonds alone. How is this possible?

9 A consumer finance book advised, "A second method of reducing costs is to make the largest downpayment possible and repay in the shortest period of time." How does this strategy reduce costs? Would you recommend that borrowers always follow this advice?

10 In November of 1996, The Wall Street Journal reported that the Strong Discovery Fund "was undone by a late 1995 bet that the U.S. economy was sliding into recession and ... moved 40% of the aggressive-growth fund's assets into long-term zero-coupon Treasury bonds and watched those highly volatile instruments get creamed when the economy...perked up."[Karen Damato, "Some Funds Fizzle in Hot Market," The Wall Street Journal, November? 1996.]

   a. Why are these Treasury bonds highly volatile?

   b. Why did a perky economy cream this investment?