1) CDS were utilized by financial institutions to protect portfolios of bonds from erosion in value. A main writer of CDS was AIG Financial Products. When AIG Financial Products became less and less solvent value of CDS fell and this increased risk of default by financial institutions which relied on insurance offered by CDS contracts as the protection against credit events (defaults on underlying assets).
2) We would expect that, all else being equal, investors would pay less for the stock which they view as having become more risky. Suppose the stock has just paid a $2.00-per-share dividend. Analysts believe that future dividends will grow at the 14% rate. The constant dividend growth rate is 4%. What would the stock price be?
3) Finance text book sold 45,500 copies in its first year. Publishing company expects the sales to grow at the rate of 17.0 percent for next three years, and by 7.0 percent in fourth year. Compute the total number of copies that publisher expects to sell in year 3 and 4.