answer

watching

views

5 Apr 2018

This assignment requires the following knowledge: For k different events, if the probability that each of them happens is p (0 < p < 1) and all events happen independently, the probability that all events happen together is p^k.
1. Five firms, namely A, B, C, D and E, issue discounted bonds with face value $1,000 and maturity 5 years in the market. All firms are pretty risky and each of them has a chance of 0.5 of collapse during the five years (thus bankrupted and can not pay back the bond accordingly). The bonds are all sold at an interest rate of 50% (the value is not surprising due to the extremely high risk of default).
(1) What is the present value of the bond given the interest rate, the face value and the maturity? Hint: we temporarily do not consider the issue of default.
(2) Say now you buy one bond from each of the five firms, what is the total amount you lend out today? Eventually only one firm does not fail and pays back the bond, what is the money you collect back 5 years later? You gain or loss in this case? If more than one firm pays back the bond, will you get more money back?
(3) What is the chance (probability) that you get nothing back assuming that firms fail independently? Together with the answer in (2), is it a good deal to buy one bond from each of the five firms?
(4) Repeat (2) and (3) with the only difference that now you buy 5 bonds from a single firm.
(5) Now we assume that the five firms all have similar businesses in Greece (and those are their only businesses), therefore, all firm fail together if the economy in Greece fails. Will you answer in (3) change?

answer

watching

130

views

For unlimited access to Homework Help, a Homework+ subscription is required.

You have 0 free answers left.
Get unlimited access to 3.8 million step-by-step answers.

Get unlimited access

Already have an account? Log in

Casey DurganLv2

8 Apr 2018

Unlock all answers

Get 1 free homework help answer.

Already have an account? Log in

Related questions

(Please show as much work as possible)

1. You are bidding in a second-price auction for a painting that you value at $800. You estimate that other bidders are most likely to value the painting at between $200 and $600. Which of these is likely to be your best bid?

a. $1,000

b. $800

c. $600

d. $400

2. Which of the following is true about different ways of conducting a private-value auction?

a. A first-price auction is strategically equivalent to a second-price auction.

b. A first-price auction is strategically equivalent to an English auction.

c. A second-price auction is strategically equivalent to an English auction.

d. None of the above

3. Suppose that five bidders with values of $500, $400, $300, $200, and $100 attend an oral auction. Which of these is closest to the winning price?

a. $500

b. $400

c. $300

d. $200

4. In the above auction, if the bidders with the first- and third-highest values ($500 and

$300) collude, which of these is closest to the winning price?

a. $500

b. $400

c. $300

d. $200

5. If a seller is concerned about collusion among bidders, which of the following changes to the auction, should the seller make?

a. Hold frequent, small auctions instead of infrequent large auctions.

b. Conceal the amount of winning bids.

c. Publically announce the name of each auction's winner.

d. Hold a second-price instead of a first-price auction.

6. You're holding an auction to license a new technology that your company has developed. One of your assistants raises a concern that bidders' fear of the winner's curse may encourage them to shade their bids. How might you address this concern?

a. Release your analyst's positive scenario for the technology's future profitability.

b. Release your analyst's negative scenario for the technology's future profitability.

c. Use an oral auction.

d. All of the above

7. In a first-price auction, you bid ________ your value, and in a second-price auction you bid _________ your value.

a. at; above

b. below; above

c. below; at

d. below; below

8. You hold an auction among three bidders. You estimate that each bidder has a value of either $16 or $20 for the item, and you attach probabilities to each value of 50%. What is the expected price? If two of the three bidders collude, what is the price?

9. In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder. (There is no reorganization through Chapter 11 bankruptcy.) The current managers are often high bidders for the company. Why?

10. When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, representatives of other museums that have no chance of winning are actively wooed by the auctioneer to attend anyway. Why?

11. The deities Mars and Venus often do battle to create the weather conditions on Earth. Venus prefers extreme temperatures (especially heat), while Mars prefers temperate conditions. The payoffs (expressed in Points of Wrath) are given below.

		Venus
		Warm	Chill
Mars	Warm	20 , 0	0 , 10
Chill	0 , 90	20 , 0

What is the unique mixed-strategy equilibrium of the above game?

(Let p be the probability of "Warm" for Mars, and q the probability of "Warm" for Venus.)

a) p=9/10, q=1/2

b) p=1/2, q=1/10

c) p=1/2, q=1/2

d) p=1/10, q=1/10

Player 2

		H	D
Player 1	H	0 , 0	4 , 1
D	1 , 4	2 , 2

12. The above game is the title of the hawk-dove game and used by evolutionary biologists to describe evolutionary processes. It is also used to model how a business should grow. In the above game, what is the Nash equilibrium in pure strategies and mixed strategies.?

Assume the cost of producing the goods is zero and that each consumer will purchase each good as long as the price is less than or equal to value. Consumer values are the entries in the table.

	Good 1	Good 2
Consumer A	$2,300	$1,700
Consumer B	$2,800	$1,200

13. Suppose the monopolist only sold the goods separately. What price will the monopolist charge for good 1 to maximize revenues for good 1?

a. $2,300

b. $2,800

c. $1,200

d. $1,700

14. What is the total profit to the monopolist from selling the goods separately?

a. $4,500

b. $6,300

c. $7,000

d. $6,000

15. What is a better pricing strategy for the monopolist? At this price, what are the total profits to the monopolist?

a. Bundle the goods at $2,800; Profits = $5,600

b. Bundle the goods at $4,000; Profits = $8,000

c. Charge $2,800 for good 1 and charge $1,700 for good 2; Profits = $4,500

d. Charging the lowest price for each good individually is the best pricing strategy; Profits = $7,000

16. The prisoners' dilemma is an example of

a. a sequential game.

b. a simultaneous game.

c.a shirking game.

d. a dating game

17. Nash equilibrium

a. is where one player maximizes his payoff, and the other doesn't.

b. is where each player maximizes his own payoff given the action of the other player.

c.is where both players are maximizing their total payoff.

d. is a unique prediction of the likely outcome of a game.

viridianlocust640

What valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value isn't enough -- you also need to capture some of the value you create. This means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits -- more than 100 times the airline industry's profit margin that year. Google makes so much money that it is now worth three times more than every U.S. airline combined. The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly. "Perfect competition" is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they'll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit. The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits. To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top. I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute. Google is a good example of a company that went from 0 to 1: It hasn't competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo! Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don't build an undifferentiated commodity business. How much of the world is actually monopolistic? How much is truly competitive? It is hard to say because our common conversation about these matters is so confused. To the outside observer, all businesses can seem reasonably alike, so it is easy to perceive only small differences between them. But the reality is much more binary than that. There is an enormous difference between perfect competition and monopoly, and most businesses are much closer to one extreme than we commonly realize. The confusion comes from a universal bias for describing market conditions in self-serving ways: Both monopolists and competitors are incentivized to bend the truth. Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly -- usually by exaggerating the power of their (nonexistent) competition. Think about how Google talks about its business. It certainly doesn't claim to be a monopoly. But is it one? Well, it depends: a monopoly in what? Let's say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its closest competitors, Microsoft and Yahoo!, have about 19% and 10%, respectively.) If that doesn't seem dominant enough, consider the fact that the word "google" is now an official entry in the Oxford English Dictionary -- as a verb. Don't hold your breath waiting for that to happen to Bing. But suppose we say that Google is primarily an advertising company. That changes things. The U.S. search-engine advertising market is $17 billion annually. Online advertising is $37 billion annually. The entire U.S. advertising market is $150 billion. And global advertising is a $495 billion market. So even if Google completely monopolized U.S. search-engine advertising, it would own just 3.4% of the global advertising market. From this angle, Google looks like a small player in a competitive world. What if we frame Google as a multifaceted technology company instead? This seems reasonable enough; in addition to its search engine, Google makes dozens of other software products, not to mention robotic cars, Android phones and wearable computers. But 95% of Google's revenue comes from search advertising; its other products generated just $2.35 billion in 2012 and its consumer-tech products a mere fraction of that. Since consumer tech is a $964 billion market globally, Google owns less than 0.24% of it -- a far cry from relevance, let alone monopoly. Framing itself as just another tech company allows Google to escape all sorts of unwanted attention. Non-monopolists tell the opposite lie: "We're in a league of our own." Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition. Suppose you want to start a restaurant in Palo Alto that serves British food. "No one else is doing it," you might reason. "We'll own the entire market." But that is only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? These are hard questions, but the bigger problem is that you have an incentive not to ask them at all. When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about how yours is different. You'll spend time trying to convince people that you are exceptional instead of seriously considering whether that is true. It would be better to pause and consider whether there are people in Palo Alto who would rather eat British food above all else. They may well not exist. In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in Mountain View, Calif. We had our pick of restaurants, starting with obvious categories like Indian, sushi and burgers. There were more options once we settled on a type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local restaurant market, PayPal was then the only email-based payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors -- maybe you think your naan is superior because of your great-grandmother's recipe -- your business is unlikely to survive. The problem with a competitive business goes beyond lack of profits. Imagine you're running one of those restaurants in Mountain View. You're not that different from dozens of your competitors, so you've got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you'll need to squeeze out every efficiency: That is why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. A monopoly like Google is different. Since it doesn't have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world. Google's motto -- "Don't be evil" -- is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can't. In perfect competition, a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits. So a monopoly is good for everyone on the inside, but what about everyone on the outside? Do outsize profits come at the expense of the rest of society? Actually, yes: Profits come out of customers' wallets, and monopolies deserve their bad reputation -- but only in a world where nothing changes. In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. Think of the famous board game: Deeds are shuffled around from player to player, but the board never changes. There is no way to win by inventing a better kind of real-estate development. The relative values of the properties are fixed for all time, so all you can do is try to buy them up. But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better. Even the government knows this: That is why one of its departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases). It is possible to question whether anyone should really be awarded a monopoly simply for having been the first to think of something like a mobile software design. But something like Apple's monopoly profits from designing, producing and marketing the iPhone were clearly the reward for creating greater abundance, not artificial scarcity: Customers were happy to finally have the choice of paying high prices to get a smartphone that actually works. The dynamism of new monopolies itself explains why old monopolies don't strangle innovation. With Apple's iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft's decadeslong operating system dominance. Before that, IBM's hardware monopoly of the 1960s and '70s was overtaken by Microsoft's software monopoly. AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cellphone plan from any number of providers. If the tendency of monopoly businesses was to hold back progress, they would be dangerous, and we'd be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and finance the ambitious research projects that firms locked in competition can't dream of. So why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that is what's easy to model, not because it represents the best of business. But the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed and everything comes to rest -- also known as the heat death of the universe. Whatever your views on thermodynamics, it is a powerful metaphor. In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won't matter to the world; some other undifferentiated competitor will always be ready to take your place. Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business. Tolstoy famously opens "Anna Karenina" by observing: "All happy families are alike; each unhappy family is unhappy in its own way." Business is the opposite. All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.

According to the article above by Peter Thiel do you think perfect competition is best for the economy and for consumers? Why or why not? What does Peter Thiel think about perfect competition versus monopolies?

Let's change it up a little. You may have to dig a little for this one. Fannie Mae and Freddie Mac are two banking giants that have been in news because of their role in the 2008 financial crisis. Due to this many in the government believe that the two companies should be put out of business. On the other hand, there are many who believe the companies should remain as they are. See The Case For Keeping Fannie and Freddie Alive. The argument both ways is in a sales pitch for the two contrary opinions. how would you convince someone either way on the issue of Fannie and Freddie? A reference is required to support your post

On just one major piece of economic policy, President Obama and House Republicans share the same basic opinion: kill off government-backed mortgage giants Fannie Mae and Freddie Mac.

This rare bit of consensus might also prove to be a devastating mistake.

Fannie and Freddie which guarantee mortgages were placed under federal conservatorship in 2008 as the housing bust reached its apex. The firms are roughly within $42 billion of repaying the $187.5 billion they received from taxpayers, but Obama and much of Congress plan to wind them down in the belief that another federal bailout will never again be necessary.

We can't leave taxpayers on the hook for irresponsibility or bad decisions by some of these lenders or Fannie Mae or Freddie Mac, Obama said in a speech this month. We've got to encourage the pursuit of profit, but the era of expecting a bailout after you pursue your profit and you don't manage your risk well, that puts the whole country at risk. And we're ending those days. We're not going to do that anymore.

But the political debate has been lopsided thus far focused on putting Fannie and Freddie into the grave, while largely ignoring what their demise could mean for homebuyers and the economy a sharp jump in interest rates, and a drop in the availability of mortgages.

Senate Majority Leader Harry Reid (D-NV) has objected to plans to end both companies.

These are the government organizations that have made homeownership so easy, Reid recently told Nevada Public Radio. I don't agree with the president. He says he wants to get rid of them. I'm going to look closely at his recommendations because on their face, I don't like them.

Mostly, economists and investors are framing the issue in the same way as Reid.

It boils down to a tradeoff between shifting risk away from the government and taxpayers, versus keeping mortgages inexpensive and widely available, said Jed Kolko, the chief economist at the real estate firm Trulia. When push comes to shove, it's hard to do both.

Their executives received outlandish bonuses during the boom, only to foist the eventual losses caused by years of mismanagement onto the public. It rightfully enables sucker punches from Capitol Hill that voters approve of, even though the rescue kept the entire housing sector alive. Of the $1.75 trillion worth of mortgages originated last year, about 90 percent were made through the federal government.

This point matters because Fannie and Freddie ensure that the housing market does not seize up during a recession, said Ken Fears, an economist for the National Association of Realtors. Even if more private capital is needed in the mortgage industry, having the government participation creates liquidity that keeps the entire sector operating during tough economic times, Fears said.

Lawmakers tend to assume that the markets can transition over five or 10 years to a mortgage industry with a modest government backstop, or no taxpayer support at all. Before retiring at the end of May as a managing director for bond investor PIMCO, Scott Simon said that this amounted to a fantasy.

The private market can make mortgages, but they would trade at much higher yields and the down payments would be much higher because the private market cannot make competitive, fixed-rate mortgages with 20% or less of a down payment on the loans, Simon told National Mortgage News. Most of the people who think we should shut [the GSEs] down have a pure philosophical belief and they don't care what the outcome is. Or they simply don't understand anything about how housing finance works.

Fannie and Freddie help the economy with their guarantees, Simon reasoned but exposed taxpayers to their risks by having their own investment portfolios.

As of now, all profits from both companies go to the Treasury Department, per changes made last year to the terms of the conservatorship. In the original terms, Treasury received a 10 percent dividend from Fannie and Freddie. But Fannie and Freddie are now required to fork over all of their earnings forever to Treasury, a windfall that suddenly reduced the budget deficit.

A group of investors led by the hedge fund Perry Capital challenged this arrangement in a U.S. District Court lawsuit filed last month, claiming that they deserve a share of the proceeds after taxpayers have been repaid.

Because Fannie and Freddie are now generating cash, it would in theory be possible for the government to use these profits to create a capital cushion that prevents the need for a future taxpayer bailout.

By keeping the two companies under government control, taxpayers would benefit from the sale of about $200 billion worth of equity, investors in Fannie, Freddie, and other real estate assets explained in the background. The profits would be enough to create a capital cushion to insulate against a future downturn, without having to seek capital in the private market that could push mortgage interest rates higher.

But this requires Obama and GOP lawmakers to save Fannie and Freddie, precisely what they have vowed not to do. Obama wants a government insurance fund to replace them, while Republican congressmen favor an end to any Washington involvement with guarantees.

House Financial Services Committee Chairman Jeb Hensarling (R-TX) would eliminate almost all federal involvement in the mortgage market. His policy assumes that the rusty tin standard of 30-year, fixed-rate mortgages would soon fade away, as more homebuyers would settle for variable-rate mortgages. Interest rates on a 30-year, fixed mortgage currently average 4.4 percent, a figure that could instead swing violently over time depending on inflation and the Federal Reserve. When the Fed attempted to tamp down inflation between 1980 and 1982, rates soared above 16 percent with the government backstop in place.

Obama would like to preserve the 30-year, fixed-rate mortgage. He has endorsed adopting a more limited government backstop as outlined in a bipartisan Senate bill co-sponsored by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner.

The Corker-Warner bill would also unwind Fannie and Freddie, bringing their dominance to an end. In their place would be private financial institutions that would pay into a government insurance fund. Mark Zandi, the chief economist for Moody's Analytics, estimated that the plan would cause mortgage rates to increase by as much as 1.25 percent in the near-term. This estimate assumes a 20 percent down payment and a credit score of 750, slightly above the current U.S. average.

But of course, lawmakers have not discussed the potential tradeoffs in the early stages of mortgage reform. Unless voters have a clearer picture of the consequences, some say it could produce the same kind of boondoggle caused by Obamacare in 2010.

I don't think there has been much of a sales job to the public on what a new mortgage finance system looks like, said Brian Gardner, senior vice president of Washington research at the investment bank Keefe, Bruyette & Woods. I don't think you shove this down the throat of the electorate, as we saw with the health care overhaul.