1 a) b) c) 1. Zaggy Zargawhoop has an idea for a new business. In order to develop his idea, he needs toinvest $600 today. Zaggy's idea will pay off $690 next year for certain.Suppose that Zaggy has no savings to fund his idea and has to borrow money from the bank.a. Suppose that the interest rate for borrowing and for lending is 12%. Should Zaggy borrowmoney from the bank to fund his idea?b. Suppose that the interest rate for borrowing and for lending is 22%. Should Zaggy borrowmoney from the bank to fund his idea?Now suppose that Zaggy has $600 in his bank account.c. Suppose that the interest rate for borrowing and for lending is 12%. Should Zaggy withdrawhis savings to fund his idea?d. Suppose that the interest rate for borrowing and for lending is 22%. Should Zaggy withdrawhis savings to fund his idea?e. Does the method of financing (whether through savings or debt) appear to affect therelationship between the interest rate and the decision to undertake investment? Explain.

i $600 today. Zaggy's idea will pay off $690 next year for certain. ose that Zaggy has no savings to fund his idea and has to borrow money from the bar ppose that the interest rate for borrowing and for lending is 12%. Should Zaggy bon y from the bank to fund his idea? ppose that the interest rate for borrowing and for lending is 22%. Should Zaggy bor y from the bank to fund his idea? suppose that Zaggy has $600 in his bank account. ppose that the interest rate for borrowing and for lending is 12%. Should Zaggy witl vings to fund his idea? ppose that the interest rate for borrowing and for lending is 22%. Should Zaggy wit vings to fund his idea? bes the method of financing (whether through savings or debt) appear to affect the anshin between the interest rote ond the decision to dertoke investment2 Evploin

i $600 today. Zaggy's idea will pay off $690 next year for certain. ose that Zaggy has no savings to fund his idea and has to borrow money from the bar ppose that the interest rate for borrowing and for lending is 12%. Should Zaggy bon y from the bank to fund his idea? ppose that the interest rate for borrowing and for lending is 22%. Should Zaggy bor y from the bank to fund his idea? suppose that Zaggy has $600 in his bank account. ppose that the interest rate for borrowing and for lending is 12%. Should Zaggy witl vings to fund his idea? ppose that the interest rate for borrowing and for lending is 22%. Should Zaggy wit vings to fund his idea? bes the method of financing (whether through savings or debt) appear to affect the anshin between the interest rote ond the decision to dertoke investment2 Evploin

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter8: Savings,investment And The Financial System

Section: Chapter Questions

Problem 7PA

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6. An investor purchases a 30-year U.S. government bond for $840. The bond’s couponrate is 10 percent and, it still had twelve years remaining until maturity. If the investorholds the bond until it matures and collects the $1000 par value from the Treasuryand his marginal tax rate is 25 percent (we assume that the bond is taxable), what willbe his after-tax (effective) yield to maturity? Make sure to show your work.
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.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?
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5. If you want an investment to double in3 years, what interest rate must it earn? (Hint: Solve for the interest rate)
6. A) If a company will pay $100,000 for a truck that will increase deliveries to be made, giving an additional $15,000 in revenue each year for 10 years, should the company buy it? Interest rates are 5%. Show your math. B) Now revenue is estimated to be only $12,000 a year for 10 years. Same interest rate, should the truck be purchased? C) Explain where interest rates come from, using details.
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.