Questions Exercise Assignment Example | Topics and Well Written Essays - 750 words

Questions Exercise - Assignment ExampleThe borrower has to take the decision either to go with the higher fixed-rate mortgage or to borrow the specie on lower but fluctuating rate. This decision of the borrower must be backed by the k right away-how of the interest rates (stability of the market rates) of the market. The duration of the mortgage is to a fault a key factor to determine the borrowing decision.A fixed-payment loan allows the borrower an amount of principal. The amount of the principal and the interest are paid on fitting payments (annual, semi-annually, monthly, weekly or daily). The equal payment consists a portion of the interest rate and the principal. On the other hand the coupon bonds are acquired by remunerative some money initially. The owner is entitled to receive coupon payments (annually, semi-annually or others, as defined by the owner) and a face value for the coupon at the end. The coupon payment is derived by multiplying the Face look on and Coupon Rat e (FV*r).Option 1 is same as 80,000 at both interest rates. The pith present value (PV) of option 2 is decreased by (81,911-74,840=7071) and the decrease in PV of option 3 can also be observed by comparing values at interest rate of 5% and 12%. At higher interest rates the present value received all year decreases (increase in interest rates causes the PV to decrease).The best possible way to minimize the risk would be to invest in B and C (as thither lie a perfect negative correlation). The expected value is also same for both B & C. If investment in B does not coiffure well the investment C will perform well. The expected value is guaranteed and the element of risk is negligible.(b) By adding in your investment an additional $1,000, the Expected Value will be doubled (EV= .5*(1600-1000) + .5*(2800-1000) =1200 or 20%). The SD is also doubled (.5*(600-1200)2 + .5*(1800-1200)21/2 =600).If the borrowed amount is increased to $2,000 and the total investment is now $3,000 the