An alumnus of a certain university wants to provide a P250,000 research fellowship at the end of each year for the next five years. If the university can invest money at 8% effective, how much should the man give now to set up a fund for the scholarship?
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- Three students have each saved $1,000.each has an investment opportunity in which he or she can invest upto $2,000.Here are the rates of return on the students investment project:a.If borrowing and lendind are prohibited,so each student uses only personal saving to finance his or her own investment project ,how much will each student have a year later when the project pays its return?b.Now suppose their school opens up a market for loanable funds in which students ran borrow and lend among themselves at an interest rate r.What would determine whether a student would choose to be a borrower or lender in this market?c.Among these three students,what would be the quantity of loanable funds supplied and quantity demanded at an interest rate of 7 percent?At 10percent?d.At what interest rate would the loanable funds market among these three students be in equilibrium?At this interest rate,which student(s) would borrow and which student(s) would lend?e.At the equilibrium interest rate,how…As and example of a possible investment restriction, an insurer mah only be allowed to invest up to 20 percent of its assets in common stock. What penalty is imposed upon the insurer that invests 30 percent of available assets in common stock?A. The additional 10 percent must be disposed of by year endB. The state regulators would impose a 10 percent fine on the insurer.C. The additional 10 percent would be a nonadmitted asset.D. The additional 10 percent would only be listed at cost.(1) Do you think you currently have the disciplineneeded to control your spending in order to free upcash for regular investing? If not, what changes couldyou make? (2) If someone gave you a “hot tip” on astock, how would you go about researching theopportunity before making an investment decision?
- The cost of having more capital and being more productive in the future is reduced consumption in the current period. O private O marginal O opportunity social4. Ted Baxter runs a small, very stable newspaper company insouthern Oregon. The paper has been in business for 25 years.The total value of the firm’s capital stock is $1 million, which Tedowns outright. This year the firm earned a total of $250,000after out-of-pocket expenses. Without taking the opportunitycost of capital into account, this means that Ted is earning a25 percent return on his capital. Suppose that risk-free bondsare currently paying a rate of 10 percent to those who buy them.d. How much excess profit is Ted earning?4. Ted Baxter runs a small, very stable newspaper company insouthern Oregon. The paper has been in business for 25 years.The total value of the firm’s capital stock is $1 million, which Tedowns outright. This year the firm earned a total of $250,000after out-of-pocket expenses. Without taking the opportunitycost of capital into account, this means that Ted is earning a25 percent return on his capital. Suppose that risk-free bondsare currently paying a rate of 10 percent to those who buy them.a. What is meant by the “opportunity cost of capital”?b. Explain why opportunity costs are “real” costs even thoughthey do not necessarily involve out-of-pocket expenses. c. What is the opportunity cost of Ted’s capital?d. How much excess profit is Ted earning?
- 8 If nco>0 greater than zero do we say nco is positive? When we way nco>0 means that we have foregin money right? And if nco is less than zero do we way nco is negative? If nco is less than zero we call capital inflow Why do we say so? What dose capital out and inflow mean?Don has an idea for a new business. In order to develop his idea, he needs to invest $600 today. Don's idea will pay off $690 next year for certain. Now suppose that Don has $600 in his bank account. c. Suppose that the interest rate for borrowing and for lending is 12%. Should Don withdraw his savings to fund his idea? d. Suppose that the interest rate for borrowing and for lending is 22%. Should Don withdraw his savings to fund his idea? e. Does the method of financing (whether through savings or debt) appear to affect the relationship between the interest rate and the decision to undertake investment? Explain.a. There are two nation, UK and RSA and the combined capital stock is OA. b. In isolation, UK invests OA of capital for a yield of OC. The TP is OFGA and RSA invests O*A of capital for a yield of O*H. The TP is and the combined capital stock is OA. b. In isolation, UK invests 0A of capital for a yield of OC. The TP is OFGA and RSA invests O*A of capital for a yield of O*H. The TP is O*JMA © 87% 4 C. Since UK is capital abundant, the return on capital is low, Capital will move to where it can earn a higher return. In this case, to SA. Therefore, AB of capital moves from the UK to RSA d. With the transfer of capital to RSA, the total return on capital in UK increases from OCGA to ONRA total return on capital in RSA falls from O*HMA to O*TRA
- When company executives buy and sell stock basedon private information they obtain as part of theirjobs, they arc engaged in insider lmding.:t Give an example of inside information that mi~;htbe useful for buying or selling stock.h. "rho,::,.. who trnriP "'tnrh hMM nn in"irlPinformation usuaUy cam very high rates ofreturn. Docs this fact violate the efficient marketshypothesis?c. Insider trading is illegal. Why do you supposethat is?Bond A pays $8,000 in 20 years. Bond B pays $8,000in 40 years. (To keep things simple, assume that theseare zero-coupon bonds, meaning the $8,000 is theonly payment the bondholder receives.)a. If the interest rate is 3.5 percent, what is the valueof each bond today? Which bond is worth more?Why? (Hint: You can use a calculator, but the ruleof 70 should make the calculation easy.)b. If the interest rate increases to 7 percent, what isthe value of each bond? Which bond has a largerpercentage change in value?c. Based on the example above, complete the twoblanks in this sentence: “The value of a bond[rises/falls] when the interest rate increases,and bonds with a longer time to maturity are[more/less] sensitive to changes in the interestrate.”How do we use these FOCs to show that (wtNt)/Yt =(1-α) if Yt = At Ktα Nt1-α
