<div class="xblock xblock-public_view xblock-public_view-vertical" data-runtime-class="LmsRuntime" data-init="VerticalStudentView" data-graded="False" data-course-id="course-v1:MITx+15.480x+3T2021" data-has-score="False" data-request-token="b4e25aac6d4411ef8ea20e199eb5def5" data-runtime-version="1" data-block-type="vertical" data-usage-id="block-v1:MITx+15.480x+3T2021+type@vertical+block@97848174357d4bd8a8e7d7f5ab9b469a"> <h2 class="hd hd-2 unit-title">Zero-Coupon Bonds</h2> <div class="vert-mod"> <div class="vert vert-0" data-id="block-v1:MITx+15.480x+3T2021+type@problem+block@52446a9e45d34fdb90c178f25a5c03cb"> <div class="xblock xblock-public_view xblock-public_view-problem xmodule_display xmodule_ProblemBlock" data-runtime-class="LmsRuntime" data-init="XBlockToXModuleShim" data-graded="False" data-course-id="course-v1:MITx+15.480x+3T2021" data-has-score="True" data-request-token="b4e25aac6d4411ef8ea20e199eb5def5" data-runtime-version="1" data-block-type="problem" data-usage-id="block-v1:MITx+15.480x+3T2021+type@problem+block@52446a9e45d34fdb90c178f25a5c03cb"> <script type="json/xblock-args" class="xblock-json-init-args"> {"xmodule-type": "Problem"} </script> <div id="problem_52446a9e45d34fdb90c178f25a5c03cb" class="problems-wrapper" role="group" aria-labelledby="52446a9e45d34fdb90c178f25a5c03cb-problem-title" data-problem-id="block-v1:MITx+15.480x+3T2021+type@problem+block@52446a9e45d34fdb90c178f25a5c03cb" data-url="/courses/course-v1:MITx+15.480x+3T2021/xblock/block-v1:MITx+15.480x+3T2021+type@problem+block@52446a9e45d34fdb90c178f25a5c03cb/handler/xmodule_handler" data-problem-score="0" data-problem-total-possible="6" data-attempts-used="0" data-content=" &lt;h3 class=&#34;hd hd-3 problem-header&#34; id=&#34;52446a9e45d34fdb90c178f25a5c03cb-problem-title&#34; aria-describedby=&#34;block-v1:MITx+15.480x+3T2021+type@problem+block@52446a9e45d34fdb90c178f25a5c03cb-problem-progress&#34; tabindex=&#34;-1&#34;&gt; Zero-Coupon Bonds &lt;/h3&gt; &lt;div class=&#34;problem-progress&#34; id=&#34;block-v1:MITx+15.480x+3T2021+type@problem+block@52446a9e45d34fdb90c178f25a5c03cb-problem-progress&#34;&gt;&lt;/div&gt; &lt;div class=&#34;problem&#34;&gt; &lt;div&gt; &lt;ol&gt; &lt;li&gt;A 5-year zero-coupon bond with a face value of $100 is trading for $91.27. What is the 5-year spot interest rate (\(r_{0,5}\))? &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;\(r_{0,5} = \)&lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 1&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_52446a9e45d34fdb90c178f25a5c03cb_2_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_2_1&#34; id=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_2_1&#34; aria-describedby=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_2_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_52446a9e45d34fdb90c178f25a5c03cb_2_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_2_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_52446a9e45d34fdb90c178f25a5c03cb_2_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;/li&gt; &lt;li&gt;Calculate the term structure of interest rates given the following zero-coupon bond prices: &lt;style&gt; table, th { border-bottom: 1px solid; border-top: 1px solid; border-collapse: collapse; } table { width: 100%; } &lt;/style&gt; &lt;table&gt;&lt;thead&gt;&lt;tr class=&#34;header&#34;&gt;&lt;th align=&#34;left&#34;&gt;Maturity&lt;/th&gt;&lt;th align=&#34;center&#34;&gt;1 year&lt;/th&gt;&lt;th align=&#34;center&#34;&gt;2 years&lt;/th&gt;&lt;th align=&#34;center&#34;&gt;5 years&lt;/th&gt;&lt;th align=&#34;center&#34;&gt;10 years&lt;/th&gt;&lt;th align=&#34;center&#34;&gt;30 years&lt;/th&gt;&lt;/tr&gt;&lt;/thead&gt;&lt;tbody&gt;&lt;tr&gt;&lt;td align=&#34;left&#34;&gt;Price&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;$99.81&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;$98.98&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;$91.27&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;$73.83&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;$29.38&lt;/td&gt;&lt;/tr&gt;&lt;/tbody&gt;&lt;/table&gt; &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;\(r_{0,1} = \)&lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 2&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_52446a9e45d34fdb90c178f25a5c03cb_3_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_3_1&#34; id=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_3_1&#34; aria-describedby=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_3_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_52446a9e45d34fdb90c178f25a5c03cb_3_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_3_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_52446a9e45d34fdb90c178f25a5c03cb_3_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;\(r_{0,2} = \)&lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 3&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_52446a9e45d34fdb90c178f25a5c03cb_4_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_4_1&#34; id=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_4_1&#34; aria-describedby=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_4_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_52446a9e45d34fdb90c178f25a5c03cb_4_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_4_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_52446a9e45d34fdb90c178f25a5c03cb_4_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;\(r_{0,5} = \)&lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 4&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_52446a9e45d34fdb90c178f25a5c03cb_5_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_5_1&#34; id=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_5_1&#34; aria-describedby=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_5_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_52446a9e45d34fdb90c178f25a5c03cb_5_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_5_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_52446a9e45d34fdb90c178f25a5c03cb_5_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;\(r_{0,10} = \)&lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 5&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_52446a9e45d34fdb90c178f25a5c03cb_6_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_6_1&#34; id=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_6_1&#34; aria-describedby=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_6_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_52446a9e45d34fdb90c178f25a5c03cb_6_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_6_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_52446a9e45d34fdb90c178f25a5c03cb_6_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;\(r_{0,30} = \)&lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 6&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_52446a9e45d34fdb90c178f25a5c03cb_7_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_7_1&#34; id=&#34;input_52446a9e45d34fdb90c178f25a5c03cb_7_1&#34; aria-describedby=&#34;status_52446a9e45d34fdb90c178f25a5c03cb_7_1&#34; 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<div class="xblock xblock-public_view xblock-public_view-vertical" data-runtime-class="LmsRuntime" data-init="VerticalStudentView" data-graded="False" data-course-id="course-v1:MITx+15.480x+3T2021" data-has-score="False" data-request-token="b4e25aac6d4411ef8ea20e199eb5def5" data-runtime-version="1" data-block-type="vertical" data-usage-id="block-v1:MITx+15.480x+3T2021+type@vertical+block@af36c44e949c43f0b2f046c58afbc3df"> <h2 class="hd hd-2 unit-title">Coupon Bonds</h2> <div class="vert-mod"> <div class="vert vert-0" data-id="block-v1:MITx+15.480x+3T2021+type@problem+block@2542f362cb6e44e2a7ac1bdcbaefcec7"> <div class="xblock xblock-public_view xblock-public_view-problem xmodule_display xmodule_ProblemBlock" data-runtime-class="LmsRuntime" data-init="XBlockToXModuleShim" data-graded="False" data-course-id="course-v1:MITx+15.480x+3T2021" data-has-score="True" data-request-token="b4e25aac6d4411ef8ea20e199eb5def5" data-runtime-version="1" data-block-type="problem" data-usage-id="block-v1:MITx+15.480x+3T2021+type@problem+block@2542f362cb6e44e2a7ac1bdcbaefcec7"> <script type="json/xblock-args" class="xblock-json-init-args"> {"xmodule-type": "Problem"} </script> <div id="problem_2542f362cb6e44e2a7ac1bdcbaefcec7" class="problems-wrapper" role="group" aria-labelledby="2542f362cb6e44e2a7ac1bdcbaefcec7-problem-title" data-problem-id="block-v1:MITx+15.480x+3T2021+type@problem+block@2542f362cb6e44e2a7ac1bdcbaefcec7" data-url="/courses/course-v1:MITx+15.480x+3T2021/xblock/block-v1:MITx+15.480x+3T2021+type@problem+block@2542f362cb6e44e2a7ac1bdcbaefcec7/handler/xmodule_handler" data-problem-score="0" data-problem-total-possible="2" data-attempts-used="0" data-content=" &lt;h3 class=&#34;hd hd-3 problem-header&#34; id=&#34;2542f362cb6e44e2a7ac1bdcbaefcec7-problem-title&#34; aria-describedby=&#34;block-v1:MITx+15.480x+3T2021+type@problem+block@2542f362cb6e44e2a7ac1bdcbaefcec7-problem-progress&#34; tabindex=&#34;-1&#34;&gt; Coupon Bonds &lt;/h3&gt; &lt;div class=&#34;problem-progress&#34; id=&#34;block-v1:MITx+15.480x+3T2021+type@problem+block@2542f362cb6e44e2a7ac1bdcbaefcec7-problem-progress&#34;&gt;&lt;/div&gt; &lt;div class=&#34;problem&#34;&gt; &lt;div&gt; Suppose that the 1-, 2-, and 3-year zero-coupon bonds have the following prices, and corresponding spot rates: &lt;style&gt; table, th { border-bottom: 1px solid; border-top: 1px solid; border-collapse: collapse; } table { width: 100%; } &lt;/style&gt; &lt;table&gt;&lt;thead&gt;&lt;tr class=&#34;header&#34;&gt;&lt;th align=&#34;left&#34;&gt;Maturity&lt;/th&gt;&lt;th align=&#34;center&#34;&gt;1 year&lt;/th&gt;&lt;th align=&#34;center&#34;&gt;2 years&lt;/th&gt;&lt;th align=&#34;center&#34;&gt;3 years&lt;/th&gt;&lt;/tr&gt;&lt;/thead&gt;&lt;tbody&gt;&lt;tr&gt;&lt;td align=&#34;left&#34;&gt;Price&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;$952&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;$898&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;$842&lt;/td&gt;&lt;/tr&gt;&lt;tr&gt;&lt;td align=&#34;left&#34;&gt;Spot rate&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;5.04%&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;5.53%&lt;/td&gt;&lt;td align=&#34;center&#34;&gt;5.90%&lt;/td&gt;&lt;/tr&gt;&lt;/tbody&gt;&lt;/table&gt; &lt;ol&gt;&lt;li&gt;What is the price of a 3-year risk-free bond with a face value of $1000, and an annual coupon rate of 5%? 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<div class="xblock xblock-public_view xblock-public_view-vertical" data-runtime-class="LmsRuntime" data-init="VerticalStudentView" data-graded="False" data-course-id="course-v1:MITx+15.480x+3T2021" data-has-score="False" data-request-token="b4e25aac6d4411ef8ea20e199eb5def5" data-runtime-version="1" data-block-type="vertical" data-usage-id="block-v1:MITx+15.480x+3T2021+type@vertical+block@b20089b71fba48c8a58cee7f368ea023"> <h2 class="hd hd-2 unit-title">Yield Spread, Risk Premium, and Default Premium</h2> <div class="vert-mod"> <div class="vert vert-0" data-id="block-v1:MITx+15.480x+3T2021+type@problem+block@1ca76f7adc4948319bf49d2211b49f8d"> <div class="xblock xblock-public_view xblock-public_view-problem xmodule_display xmodule_ProblemBlock" data-runtime-class="LmsRuntime" data-init="XBlockToXModuleShim" data-graded="False" data-course-id="course-v1:MITx+15.480x+3T2021" data-has-score="True" data-request-token="b4e25aac6d4411ef8ea20e199eb5def5" data-runtime-version="1" data-block-type="problem" data-usage-id="block-v1:MITx+15.480x+3T2021+type@problem+block@1ca76f7adc4948319bf49d2211b49f8d"> <script type="json/xblock-args" class="xblock-json-init-args"> {"xmodule-type": "Problem"} </script> <div id="problem_1ca76f7adc4948319bf49d2211b49f8d" class="problems-wrapper" role="group" aria-labelledby="1ca76f7adc4948319bf49d2211b49f8d-problem-title" data-problem-id="block-v1:MITx+15.480x+3T2021+type@problem+block@1ca76f7adc4948319bf49d2211b49f8d" data-url="/courses/course-v1:MITx+15.480x+3T2021/xblock/block-v1:MITx+15.480x+3T2021+type@problem+block@1ca76f7adc4948319bf49d2211b49f8d/handler/xmodule_handler" data-problem-score="0" data-problem-total-possible="3" data-attempts-used="0" data-content=" &lt;h3 class=&#34;hd hd-3 problem-header&#34; id=&#34;1ca76f7adc4948319bf49d2211b49f8d-problem-title&#34; aria-describedby=&#34;block-v1:MITx+15.480x+3T2021+type@problem+block@1ca76f7adc4948319bf49d2211b49f8d-problem-progress&#34; tabindex=&#34;-1&#34;&gt; Yield Spread, Risk Premium, and Default Premium &lt;/h3&gt; &lt;div class=&#34;problem-progress&#34; id=&#34;block-v1:MITx+15.480x+3T2021+type@problem+block@1ca76f7adc4948319bf49d2211b49f8d-problem-progress&#34;&gt;&lt;/div&gt; &lt;div class=&#34;problem&#34;&gt; &lt;div&gt;&lt;p&gt;Consider the following zero-coupon bonds with $1000 face values:&lt;/p&gt;&lt;ul&gt;&lt;li&gt;10-year Treasury zero-coupon bond selling for $463.19&lt;/li&gt;&lt;li&gt;10-year zero-coupon bond issued by AZ Biotech selling for $321.97&lt;/li&gt;&lt;/ul&gt; If the expected payoff of AZ Biotech&#39;s bond is $762.22, what is the yield spread, default premium, and risk premium of the bond? &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;Yield Spread = &lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 1&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_1ca76f7adc4948319bf49d2211b49f8d_2_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_1ca76f7adc4948319bf49d2211b49f8d_2_1&#34; id=&#34;input_1ca76f7adc4948319bf49d2211b49f8d_2_1&#34; aria-describedby=&#34;status_1ca76f7adc4948319bf49d2211b49f8d_2_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_1ca76f7adc4948319bf49d2211b49f8d_2_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_1ca76f7adc4948319bf49d2211b49f8d_2_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_1ca76f7adc4948319bf49d2211b49f8d_2_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;Default Premium = &lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 2&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_1ca76f7adc4948319bf49d2211b49f8d_3_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_1ca76f7adc4948319bf49d2211b49f8d_3_1&#34; id=&#34;input_1ca76f7adc4948319bf49d2211b49f8d_3_1&#34; aria-describedby=&#34;status_1ca76f7adc4948319bf49d2211b49f8d_3_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_1ca76f7adc4948319bf49d2211b49f8d_3_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_1ca76f7adc4948319bf49d2211b49f8d_3_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_1ca76f7adc4948319bf49d2211b49f8d_3_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;Risk Premium = &lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 3&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_1ca76f7adc4948319bf49d2211b49f8d_4_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_1ca76f7adc4948319bf49d2211b49f8d_4_1&#34; id=&#34;input_1ca76f7adc4948319bf49d2211b49f8d_4_1&#34; aria-describedby=&#34;status_1ca76f7adc4948319bf49d2211b49f8d_4_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_1ca76f7adc4948319bf49d2211b49f8d_4_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_1ca76f7adc4948319bf49d2211b49f8d_4_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_1ca76f7adc4948319bf49d2211b49f8d_4_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;div class=&#34;solution-span&#34;&gt; &lt;span id=&#34;solution_1ca76f7adc4948319bf49d2211b49f8d_solution_1&#34;/&gt; &lt;/div&gt;&lt;/div&gt; &lt;div class=&#34;action&#34;&gt; &lt;input type=&#34;hidden&#34; name=&#34;problem_id&#34; value=&#34;Yield Spread, Risk Premium, and Default Premium &#34; /&gt; &lt;div class=&#34;submit-attempt-container&#34;&gt; &lt;button type=&#34;button&#34; class=&#34;submit btn-brand&#34; data-submitting=&#34;Submitting&#34; data-value=&#34;Submit&#34; data-should-enable-submit-button=&#34;True&#34; aria-describedby=&#34;submission_feedback_1ca76f7adc4948319bf49d2211b49f8d&#34; &gt; &lt;span class=&#34;submit-label&#34;&gt;Submit&lt;/span&gt; &lt;/button&gt; &lt;div class=&#34;submission-feedback&#34; id=&#34;submission_feedback_1ca76f7adc4948319bf49d2211b49f8d&#34;&gt; &lt;span class=&#34;sr&#34;&gt;Some problems have options such as save, reset, hints, or show answer. 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<div class="xblock xblock-public_view xblock-public_view-vertical" data-runtime-class="LmsRuntime" data-init="VerticalStudentView" data-graded="False" data-course-id="course-v1:MITx+15.480x+3T2021" data-has-score="False" data-request-token="b4e25aac6d4411ef8ea20e199eb5def5" data-runtime-version="1" data-block-type="vertical" data-usage-id="block-v1:MITx+15.480x+3T2021+type@vertical+block@c8e963ddc5f94234a7784a310d38d5c3"> <h2 class="hd hd-2 unit-title">Present Value of Growth Opportunities</h2> <div class="vert-mod"> <div class="vert vert-0" data-id="block-v1:MITx+15.480x+3T2021+type@problem+block@e11dd127d2794828977be872842675c6"> <div class="xblock xblock-public_view xblock-public_view-problem xmodule_display xmodule_ProblemBlock" data-runtime-class="LmsRuntime" data-init="XBlockToXModuleShim" data-graded="False" data-course-id="course-v1:MITx+15.480x+3T2021" data-has-score="True" data-request-token="b4e25aac6d4411ef8ea20e199eb5def5" data-runtime-version="1" data-block-type="problem" data-usage-id="block-v1:MITx+15.480x+3T2021+type@problem+block@e11dd127d2794828977be872842675c6"> <script type="json/xblock-args" class="xblock-json-init-args"> {"xmodule-type": "Problem"} </script> <div id="problem_e11dd127d2794828977be872842675c6" class="problems-wrapper" role="group" aria-labelledby="e11dd127d2794828977be872842675c6-problem-title" data-problem-id="block-v1:MITx+15.480x+3T2021+type@problem+block@e11dd127d2794828977be872842675c6" data-url="/courses/course-v1:MITx+15.480x+3T2021/xblock/block-v1:MITx+15.480x+3T2021+type@problem+block@e11dd127d2794828977be872842675c6/handler/xmodule_handler" data-problem-score="0" data-problem-total-possible="2" data-attempts-used="0" data-content=" &lt;h3 class=&#34;hd hd-3 problem-header&#34; id=&#34;e11dd127d2794828977be872842675c6-problem-title&#34; aria-describedby=&#34;block-v1:MITx+15.480x+3T2021+type@problem+block@e11dd127d2794828977be872842675c6-problem-progress&#34; tabindex=&#34;-1&#34;&gt; Present Value of Growth Opportunities &lt;/h3&gt; &lt;div class=&#34;problem-progress&#34; id=&#34;block-v1:MITx+15.480x+3T2021+type@problem+block@e11dd127d2794828977be872842675c6-problem-progress&#34;&gt;&lt;/div&gt; &lt;div class=&#34;problem&#34;&gt; &lt;div&gt; &lt;p&gt;iDoc, an internet health service company, is expected to generate $1 in earnings per share next year and in the years to follow, from its existing assets. It plans to announce a new program to expand its business. This new program will increase its plow back ratio (the fraction of earnings retained by the company) from 0% to 50% next year. The return on equity for the new investments will be 12%. The expansion is expected to continue forever at the same rate. The cost of capital is 10%. &lt;/p&gt; &lt;ol&gt; &lt;li&gt;What is its future growth rate (\(g\)) under the new program? &lt;p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 1&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_e11dd127d2794828977be872842675c6_2_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_e11dd127d2794828977be872842675c6_2_1&#34; id=&#34;input_e11dd127d2794828977be872842675c6_2_1&#34; aria-describedby=&#34;status_e11dd127d2794828977be872842675c6_2_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_e11dd127d2794828977be872842675c6_2_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_e11dd127d2794828977be872842675c6_2_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_e11dd127d2794828977be872842675c6_2_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;p style=&#34;display:inline&#34;&gt;%&lt;/p&gt;&lt;/p&gt; &lt;/li&gt; &lt;li&gt;What is the change in iDoc&amp;#8217;s stock price in response the announcement? &lt;p&gt;&lt;p style=&#34;display:inline&#34;&gt;$&lt;/p&gt;&lt;div class=&#34;inline&#34; tabindex=&#34;-1&#34; aria-label=&#34;Question 2&#34; role=&#34;group&#34;&gt;&lt;div id=&#34;inputtype_e11dd127d2794828977be872842675c6_3_1&#34; class=&#34; capa_inputtype inline textline&#34;&gt; &lt;div class=&#34;unanswered inline&#34;&gt; &lt;input type=&#34;text&#34; name=&#34;input_e11dd127d2794828977be872842675c6_3_1&#34; id=&#34;input_e11dd127d2794828977be872842675c6_3_1&#34; aria-describedby=&#34;status_e11dd127d2794828977be872842675c6_3_1&#34; value=&#34;&#34;/&gt; &lt;span class=&#34;trailing_text&#34; id=&#34;trailing_text_e11dd127d2794828977be872842675c6_3_1&#34;/&gt; &lt;span class=&#34;status unanswered&#34; id=&#34;status_e11dd127d2794828977be872842675c6_3_1&#34; data-tooltip=&#34;Not yet answered.&#34;&gt; &lt;span class=&#34;sr&#34;&gt;unanswered&lt;/span&gt;&lt;span class=&#34;status-icon&#34; aria-hidden=&#34;true&#34;/&gt; &lt;/span&gt; &lt;p id=&#34;answer_e11dd127d2794828977be872842675c6_3_1&#34; class=&#34;answer&#34;/&gt; &lt;/div&gt; &lt;/div&gt;&lt;/div&gt;&lt;/p&gt; &lt;/li&gt; &lt;/ol&gt; &lt;div class=&#34;solution-span&#34;&gt; &lt;span id=&#34;solution_e11dd127d2794828977be872842675c6_solution_1&#34;/&gt; &lt;/div&gt;&lt;/div&gt; &lt;div class=&#34;action&#34;&gt; &lt;input type=&#34;hidden&#34; name=&#34;problem_id&#34; value=&#34;Present Value of Growth Opportunities &#34; /&gt; &lt;div class=&#34;submit-attempt-container&#34;&gt; &lt;button type=&#34;button&#34; class=&#34;submit btn-brand&#34; data-submitting=&#34;Submitting&#34; data-value=&#34;Submit&#34; data-should-enable-submit-button=&#34;True&#34; aria-describedby=&#34;submission_feedback_e11dd127d2794828977be872842675c6&#34; &gt; &lt;span class=&#34;submit-label&#34;&gt;Submit&lt;/span&gt; &lt;/button&gt; &lt;div class=&#34;submission-feedback&#34; id=&#34;submission_feedback_e11dd127d2794828977be872842675c6&#34;&gt; &lt;span class=&#34;sr&#34;&gt;Some problems have options such as save, reset, hints, or show answer. 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