1. What is the price of a 4 percent coupon bond, payable annually, with a $5,000 face value that matures in 4 years if we assume that the annual market interest rates are 3 percent?
2. You are considering buying a lottery. If the lottery pays you one year later either $9,000 with the probability of 2/3 or $3,000 with the probability of 1/3, then what would be the fair price of the lottery? (How much are you willing to pay now for the lottery?) Assume the interest rate is 10%.
3. Calculate the yearly fixed payment for a principal of $4,000 that would be paid off in 2 years when the annual interest rate is 12%. (You should not use any formula for this and solve using the two-period strategy).