1) Consumer Choice Model.
(a) Spano has a monthly income of $1,000 which he spends solely on his two favorite activities eating restaurant meals and drinking beers at bars. Each restaurant meal costs $20 and each beer costs $4. Give the algebraic formula for Spano's budget constraint.
(b) With beer on the x-axis and restaurant meals on the y-axis draw Spano's budget constraint and identify his opportunity set.
(c) Draw a set of indifference curves (3 or 4) with the budget constraint line. Show the point where Spano optimizes his utility. (remember to label)
(d) Suppose the price of a beer increases to $5. Show what happens to Spano's optimal level of consumption of restaurant meals and beer.
(e) Using the graph for problem (d) derive a demand curve.
(f) (3pts extra credit) - Suppose the bar owner gives Spano a gift certificate for 10 free beers per month. Draw Spano's new budget constraint line, assuming that the price of restaurant meals is still $20 and beers are $5 each.
2) Net Present Value: For both (a) and (b) assume that the market rate of interest is 5%. Find the net present value for the following investment opportunities:
(a) I offer to sell you a bond for $1,300. The face value of the bond is $1,200 and it matures in two years. This bond will pay you a coupon rate of 10% per year for the two remaining years. Is this bond a good investment? Why?
(b) I offer to sell you an annuity for $1,000. The annuity will pay you $100 per year for the rest of your life. Is this annuity a good investment? Why?
(c) Assuming an annual discount rate of 10%, calculate the net present value of the following investments:
(1) You invest $1,000 in a project today that pays out $100 after one year, $500 after two years, and $600 after three years.
(2) You invest $1,000 in a project today that pays out $600 after one year, $500 after two years, and $100 after three years.
(3) You invest $1,000 in a project today that pays out $150 after one year, $600 after two years, and $500 after three years.
(4) Which of these investments offers the highest financial return (a.k.a. the highest net present value)?
3) Options: Suppose you purchase 500 put options of Celsion, Inc. Each put option gives you the right to sell one share of Celsion, Inc. at a strike price of $75 to be exercised by January 1, 2016. Each put option costs $5. Suppose that on December 31, 2015 the market price of Celsion, Inc. stock is $40 per share.
a) Calculate your net profit or loss.
b) Now suppose that the market price of Celsion, Inc. on December 31, 2015 is $80 per share. Calculate your net profit or loss.
c) Now assume that you purchased 500 call options at $5 per option with a strike price of $75. Calculate your net profit or loss when the market price of Celsion, Inc. is $80 on December 31, 2015.
4) Investments:
a) What are the best characteristics of the following investments:
i) Municipal Bonds
ii) Common Stock of a bio-tech corporation.
iii) Treasury Bills
iv) Checking account.
b) List four characteristics that make corporate stock different from corporate bonds.
5) Securities Exchange: Use the internet to answer the following questions:
a) What was the closing price of Google stock on 9/30/15? What was the stock's price range during the last year?
b) How many shares of Google stock were traded on 9/30/15?
c) On 9/30/15 what are the P/E ratios for Chipotle Mexican Grill (CMG) and Starbucks (SBUX)? Based solely upon P/E ratios, which do you think is a riskier stock? Explain.