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
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
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
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
Briefly explain whether you agree with the analysis of these investors?