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Q.1;How do you value a college education;According to Statistics Canadas current population survey, at age 22, the typical college;graduate makes about $7,200 more per year than does the typical high school graduate;who has not attended college. The earnings gap between high school graduates and;college graduates grows until about age 42.;Consider the following data on the gap between earnings by college graduates and high;school graduates (for the sake of simplicity, suppose that the additional income;received by a college graduate is all received at the end of the year);Age 22: $7,200;Age 23: $7,200;Age 24: $7,300;Age 25: $7,300;a) Considering just ages 22 to 25, what is the percent value of a college education?;Assume an interest rate of 5%;b) Suppose you are 18 years old and considering whether to enter the labor force by;taking a job immediately after graduating from high school or to attend college;and enter the labor force at age 22. Briefly explain how you might calculate the;percent value for you of a college education;Q.2;Should you worry about falling bond prices when the inflation rate is low?;A columnist in the wall street journal offered the following opinion of the bond market;in September 2012, when the inflation rate was about 2%: some-one buying long-term;bonds yielding 1.5% or 2%, and then seeing consumer price inflation of 4%, will be on;the losing end of the bet.;a) Explain what will happen to the price of bonds if the expected inflation rate;increases to 4% from 2%. Be sure to include in your answer a demand and;supply graph of the bond market;b) Suppose that you expect a greater increase in inflation than do other investors;but that you dont expect the increase to occur until 2015. Should you wait until;2015 to sell your bonds? Briefly explain.;c) The columnist also argued that long-term bonds would be a good investment;only if we get serious price deflation. explains the effect on bond prices if;investors decide that price deflation is likely to occur. How would an unexpected;deflation affect the rate of return on your investment in bonds?;d) If expected inflation is increasing, would you have made a worse investment if;you had invested in long-term bonds than if you had invested in short-term;bonds?;Q.3;Should you pay attention to the advice of investment analyst?;Financial analysts typically advise investors to buy stocks whose prices they believe will;increase rapidly and to sell stocks whose prices they believe will either fall or increase;slowly. The following excerpt from an article by Bloomberg news describes how well;stock market analysts succeeded in predicting prices during one year;Shares of JDS Uniphase, the company with the most sell recommendations among analysts;had been a more profitable investment this year than Microsoft, the company with the most;buys;The article goes on to say, investors say JDS Uniphase is an example of wall street analysts;basing recommendations on past events, rather than on earnings prospects and potential share;gains.


Paper#15472 | Written in 18-Jul-2015

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