1. If the interest rate is 4%, the present value of $1400 to be received 7years from today is $______. (Round your response to the nearest two decimal place)
2. You are in a car accident, and you receive an insurance settlement of $5500 per year for the next three years. The first payment is to be received today. The second payment is to be received one year from today, and the third payment two years from today. If the interest rate is 6%, the present value of the insurance settlement is $______. (Round your response to the nearest two decimal place)
The most accurate measure of interest rates is ________.
3. The scatter plot on the right shows condition of nominal interest rates and inflation rates for 10 mythical countries. According to the Fisher equation, you would expect that all points should be _____ the 45-degree line.
The real rate for Atlantis is ____%.
The real rate of interest for Alexandria is _____%
4. How much would pay for a perpetual bond that pays an annual coupon of $200 per year and yields on competing instruments are 20%?
You would pay $_____.
If competing yields are expected to change to 10%, what is your expected capital gain (or loss)?
The expected capital gain (or loss) is $_____.
5. What is the opportunity cost of holding $1,500 in cash if the relevant interest rate is 10 percent?
The opportunity cost is $_______.
If interest rates rise, this opportunity cot will _____ , and individuals will hold ______ cash balances.
6. When an individual or institution buys a corporate bond in the primary market:
A. she is becoming part owner in the corporation.
B. no new borrowing or lending is taking place.
C. she is taking out a loan from the corporation.
D. she is making a loan to the corporation issuing the bond.
7. For every $1,000 of annual income, households maintain average cash balances (their demand for money) of $200.
How will growth in GDP affect interest rates, holding the money supply constant? Use the liquidity preference framework.
i) Using the line drawing tool, show the effect of growth in GDP using the liquidity preference framework. Properly label you line.
ii) Using the point drawing tool, indicate the new equilibrium interest rate and quantity of money. Label the point 'Z'.
Carefully follow the instructions above, and only draw the required objects.
8. Calculate the expected returns for the following two assets:
Asset A pays a return of $3,000 25% of the time and $500 75% of the time.
Asset B pays a return of $2,400 50% of the time and $400 50% of the time.
The expected return for Asset A is $_____. (Round your response to the nearest dollar.)
The expected return for Asset B is $_____. (Round your response to the nearest dollar.)
9. The figure to the right depicts the bond market.
Suppose there is a downward revision of inflation expectations. Show the effect on the bond market.
i. Using the drawing tool, show the effect on bond demand. Properly label your line.
ii. Using the drawing tool, show the effect on bond supply. Properly label your line.
iii. Using the point drawing tool, indicate the new equilibrium bond price and quantity. Label the point 'Z'.
Carefully follow the instruction above and only draw the required objects.
10. Why do financial Institutions charge interest?
a) Find the interest on $5000.00 in 10 years that mature to $15,000.00?
b) Find the present value of $25,000.00 in 8 years at semi-interest rate of 4.25%?
11. What are the 4 types of credit market instruments?
Hint: Just naming them is NOT enough. You must say something about each of them.
12. What is a bond? Who uses them? Who issues them? Give an example of a company in NYC that issues bonds? Give another example of a company in NYC that uses bonds?
Corporate profile of these companies will be appreciated.
Definition of a Bond: Company XYZ located on 42 & 5th in Manhattan, issues them Corp. Profile: Founded; Type of Business; CEO, etc.