1. Consider a 10-year bond that pays annual coupons of $10 and has a maturation value of $1000. If this bond’s yield to maturity is negative, will its price be above or below its maturation value? (You do not need to do any calculations, but you must give a definite answer.)

2. In Las Vegas in the long run, the average gambler loses money to the house. In the stock market in the long run, the average gambler/investor has made approximately 12% annually, well above the long-run rate of inflation. How can this be? If investors are winning 12% a year, are firms losing 12% a year?

3. Federal Reserve Chair Alan Greenspan is notoriously vague and cryptic. (It was reported that when he recently proposed marriage to Andrea Mitchell, she did not realize that he was asking her to marry him.) Suppose that Greenspan decided to adhere to rigid interest rate targets, announcing that the Fed will reduce the federal funds rate by 25 basis points on March 28, another 25 points on April 25, and another 25 points on May 30. Do you think that such interest rate reductions will raise or lower bond prices? If you are 100% certain the Fed will do this, can you make large profits by buying/selling bonds (a) on March 27, April 24, and May 29? (b) On March 29, April 26, and May 31?

4. At a 10% rate of return, what constant amount X would you have to invest every year for 10 years (beginning today) in order to build a nest egg that will pay you (and your heirs) $10,000 a year forever, (beginning 10 years from today)?

5. It has been estimated that to justify Yahoo’s market value at the end of 1999, it would have to increase its economic value added by $1.2 billion every year: $1.2 billion in 1999, $2.4 billion in 2000, $3.6 billion in 2001, and so on forever. By comparison, WalMart’s economic value added was $1.2 billion in 1998. Could Yahoo achieve these goals simply by using newly issued stock every year to acquire Walmart or other equally profitable companies?

6. In November 2000, Rent-Way would rent a 13-inch Toshiba combination television and video-cassette recorder for $7.99 a week; after 78 weeks, the renter would own the television. The Wall Street Journal pointed out that the total cost would be $623.22, compared to a $179.99 price at Best Buy.

7. Consider a newly incorporated firm that spends $1 million to purchase a farm that yields $80,000 in profits each year, net of all expenses including taxes. If the shareholders’ required return is 12%, what is the size of the annual economic value added? If this annual economic value added is negative, is the value of the firm negative?

8. Here are some recent data on Microsoft:

Estimate the value of Microsoft’s

9. Using the data in Question 8, what do you suppose would happen to the price of Microsoft stock if, holdings everything else constant,

10. Using the data in Question 8, predict whether each of the following would increase or decrease if Microsoft were to announce that it is going to issue 1 million new shares at a price of 57.31 and use all of the proceeds to pay a dividend to its shareholders?