Pace University
MBA 653 Financial Reporting, Analysis and Modeling of Corporate Activities
Prof. P.V. Viswanath
Fall 2007
Superquiz
Notes:
1. Tamako wants to buy a car, but the sort of car that she wants costs $45,000. Unfortunately, she only has $23,000. Fortunately, she has access to a banker, who is willing to lend her the additional money at a stated interest rate of 10% per year. Tamako has to start making payments on the loan, two years after she has taken out the loan. If she wants to be done with repaying the loan in five years (that is, she will make 36 equal payments), what is the amount of her monthly payment? (10 points)
Another banker (let's call him Lazard) wants to compete with the first banker (let's call him JP). Lazard is willing to allow Tamako to make bimonthly payments (once in 2 months), which Tamako finds attractive. However, the stated interest rate is 11%. What will Tamako's bimonthly payments be, and will she go with JP or Lazard? Assume that the payments are not delayed as in the JP case (that is, there will be 30 payments, starting in two months). (10 points)
2. (40 points) Gerber Scientific Inc. (GRB) and SPSS Inc. (SPSS) are two stocks that Punita has been considering for her portfolio. Although she knows that diversification reduces risk and she would be better off investing in many assets, she believes that GRB and SPSS are good deals, right now, and she decides to put all of her money into these two stocks. Since the two stocks are in different industries (SPSS in Software and GRB in Scientific machinery), the correlation coefficient between the two stocks is quite low, on the order of 0.25. Punita has, in addition, come up with the following additional estimates for the two stocks:
SPSS 
GRB 

Expected Return  22% 
18% 
Standard deviation of returns  10% 
23% 
3. (10 points each) Define and write two sentences about any four of these terms:
4. (Bonus; 10 points): You expect to close on a house purchase in 2 months. You have already agreed on a price of $300,000. You only have $50,000 of the money needed for the purchase, but a bank has agreed to lend you the additional $250,000. The interest rate that you will have to pay on the loan depends on market conditions in 2 months, when you will actually need the money. You are worried that interest rates might go up, and you sell futures contracts on 10 year US Treasury Notes, with a nominal value of $250,000. This futures contract is a commitment to sell U.S. Treasury notes having a face value at maturity of $100,000 with a maturity of 10 years.
Will this increase or decrease your risk of interest rates changing between now and the time you buy your house? Why?