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1. A wealthy investor has no other source of income beyond her investments. Her investment advisor recommends that she should form her portfolio to cyclical stocks and high-yield bonds because the average investor holds a job and is recession sensitive. Explain the advisor’s advice.

2. Which is greater, lenders’ yield or effective borrowing cost? Why?

3. Suppose that Dwight is buying a farm using a 20-year mortgage. The initial loan balance is $230,000. The lender offers a loan at 2.5 discount points and there are $3,900 of 3rd party expenses. a. Compute his monthly mortgage payment using a rate of 3.8%. b. What is the lender’s yield? c. What is the effective borrowing cost?

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Financial Management, Finance

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