Economics (McConnell) AP Edition, 19th Edition

Chapter 34: Financial Economics

Web-based Questions

1
Calculating present values using current interest rates To see the current interest rates ("yields") on bonds issued by the U.S. government, please go to www.bloomberg.com/markets/rates/index.html and scroll down to the section labeled U.S. Treasuries. By tradition, U.S. government bonds with maturities of less than 1 year are called bills, while those with longer maturities are referred to as either notes or bonds. The notes have maturities of 1 to 10 years, while the bonds have maturities exceeding 10 years. What are the current yields on 2-year notes and 30-year bonds? Use the current yield for the 2-year note to calculate the present value of an investment that will make a single payment of $95,000 in 2 years. Use the current yield on the 30-year bond to calculate the present value of an investment that will make a single payment of $95,000 in 30 years. To assist your computations, you can try out the present value calculator available at www.timevalue.com/tools.html. (When you go to that page, click on the TCalc, and scroll down to the Investment Calculators menu and then select "What is my future value worth today?" That will get you to the present value calculator.) Why the large difference in present values in the two situations?
2
Evaluating the risk levels of top mutual funds The Security Market Line tells us that assets and portfolios that deliver high average expected rates of return should also have high levels of risk as measured by beta. Let us see if this appears to hold true for mutual fund portfolios. Go to the Mutual Fund Center at Yahoo Finance at http://finance.yahoo.com/funds, click on "Top Performers," and then click on "Overall Top Performers." This will give you lists of funds with the 10 best rates of return over various time periods. Click on each of the 10 funds listed under "Top Performers—1 Year" and find each fund's beta by clicking on the link labeled "Risk." Do any of the funds have a beta less than 1.0? Do these results make sense given what you have learned? Should you be impressed that funds with risky portfolios generate high returns?
McConnell Economics Nineteenth Edition Large Cover Image
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