1. You purchased a lottery ticket and won the Grand Prize of $100 million SARs.

Question

1. You purchased a lottery ticket and won the Grand Prize of $100 million SARs. CONGRATULATIONS! You will receive your TAX-FREE winnings in five (5) equal payments as follows: $20 million SARS today, $20 million SARs one year later, $20 million SARs two years later, $20 million SARs three years later, and $20 million SARs four years later.   Hence, you will receive a total of $100 million SARs.

Did you really win $100 million SARS?

Why or Why not?

What additional information is necessary to accurately estimate your total winnings?

2. In terms of timing of cash flow payments, there are four (4) basic types of credit market instruments?

List at least three (3) of these different types.

Define at least three (3) of these different types.

How would you decide which of these instruments provides you with more income?

3. Assuming a decline in interest rates, answer the following questions:

Would you rather own long-term or short-term bonds?

Explain why.

Explain which bond has the greater “Interest Rate Risk.”

4. Financial intermediaries play an important role in the financial system

List at least three benefits to the economy due to services provided by financial intermediaries.

How do financial intermediaries INCREASE efficiency of financial markets?

How do conflicts of interest by financial intermediaries make financial markets LESS efficient?   Provide an example.

5. Suppose you live on an island that produces three primary goods that are produced by three individuals as follows:     

Oranges                  Orange Grove Owner

Bananas                  Banana Grower

                          (c) Chocolate                Chocolate Maker

            6. In this island economy, the (a) Orange Grove Owner likes only bananas and the (b) Banana Grower only likes Chocolate. Furthermore, the (c) Chocolate Maker only likes Oranges.

Explain how trade between these three producers can occur.

Will the Orange Grove Owner be able to eat Bananas? Explain.

How will introducing “money” into the island economy benefit these three producers?

Explanation / Answer

1)

I did not win $100m SARS, due to time value of money, which is given by

PV= FV / (1+r)^n

Discount rate is neccessary to accurately calculate total winnings

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