Financial Probs a Medical Malpractice Term Paper

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Current interest rates are 5% and the contract rate is 5%. The value of the contracted payment is $50,000. Should interest rates increase, there would again be a danger in the loss of potential funds, as the fixed rate agreement (i.e. The contract rate) would then be of a lower value than other potential interest earning activities.

c.

The next annual payment on an 6% interest rate cap on a notational amount of $1 million if current rates are 8%. The payment would be 2% of $1 million, or $20,000. If the interest rate drops below 6%, however, no payment will be made at all, and any drop in the interest rate as of the day of the contracted payment -- even a sudden drop limited to that day -- would result in a reduced or potentially vanished payment.

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12.

Given the following yields on U.S. Treasuries, determine the spot rates and one-year and two-year forward rates at each date. Assume that the 1-year Treasury is a discount security and that all longer instruments are coupon-bearing bonds. For simplicity, assume that all bonds pay ANNUAL coupons and that all rates are effective (annual) interest rates. That is, do NOT assume semiannual compounding.

Note that you will not be able to fill in EVERY box. Part of the exercise is for you to understand what boxes you cannot fill in. The appropriate symbols are given for the first few rates in order to help you get….....

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