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1) Economic recession of 2008-2009 had many causes, one of which was so called "subprime crisis." Financial institutions utilized sophisticated models and simulation techniques to price mortgage-backed securities (MBS) and these securities ended up being harshly overpriced. What lessons for future can we learn from this mispricing of MBS? describe precautionary mechanisms would you propose to avoid repetition of this crisis in future?

2) Assume that risk-neutral investor has choice between purchasing one-year bond paying 4% today, two-year bond paying 5% today, a 3-year bond paying 5.3% today, or a 4-year bond paying 5.8% today, if one-year bond bought one year from now is expected to have the interest rate of 5.5%, a 1-year bond bought 2 years from now is expected to have the interest rate of 6%, and a 1-year bond bought 3 years from now is expected to have the interest rate of 7%. The investor would buy:

a) A one-year bond today.
b) A two-year bond today.
c) A three-year bond today.
d) A four-year bond today.

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  • Category:- Basic Finance
  • Reference No.:- M915306

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