Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 18, Problem 3P
To determine
Interest rate for an infinity time period.
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Students have asked these similar questions
An investor purchasing a British consol is entitled to receive annual payments from the British government forever.
What is the price of a consol that pays $250 annually if the next payment occurs one year from today? The market interest rate is 3.6
percent. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
Present value
$
Suppose that the market interest rate in an economy is 7 percent and a bond promises to pay $615 after one year, $856 two years from now, and finally $1423 three years from now
The equilibrium market price of this bond is $
(Round your response to two decimal places)
If this bond were to sell for $2981 in the market,
then it is profitable
this bond from investors' perspectives.
The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £)as a function of the price of the bond is S = 2P + 400.
b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantity demanded/supplied at this interest rate? What happens to the demand/supply of the bond as the interest rate increases? Explain why.
c) What is the equilibrium interest rate?
d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain.
e) There is a business cycle contraction, so both supply and demand shifts. After the shift, the new demand curve is given by: D = 4000 + X − 2P , whereas the new supply curve is S = 2P + 200. For which values of X will the interest increase/decrease? Which values of X are in line with empirical data?
Please show all the steps and equations used to get to the answers.
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- The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £)as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantity demanded/supplied at this interest rate? What happens to the demand/supply of the bond as the interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain. e) There is a business cycle contraction, so both supply and demand shifts. After the shift, the new demand curve is given by: D = 4000 + X − 2P , whereas the new supply curve is S = 2P + 200. For which values of X will the interest increase/decrease? Which values of X are in line with empirical data?arrow_forwardThe price of a bond with no expiration date is originally $1,000 and has a fixed annual interest payment of $150. If the price of the bond then falls by $250, what will be the interest rate yield to a new buyer of the bond?arrow_forwardSuppose the interest rate is 10%. If $100 is invested at this rate today, how much will it be worth after one year? After two years? After five years? What is the value today of $100 paid one year from now? Paid two years from now? Paid five years from now?arrow_forward
- If a financial asset that is valued at $18,455 in the Stock Market today would be worth $39,200 in 2 years’ time, what would have been the prevailing interest rate in the financial market?arrow_forwardA zero-coupon bond is a bond that is sold for less than its face value (that is, it is discounted) and has no periodic interest payments. Instead, the bond is redeemed for its face value at maturity. Thus, in this sense, interest is paid at maturity. Suppose that a zero-coupon bond sells for $8,500 and can be redeemed in 20-years for its face value of $38,000. What is the annual compound rate of return? Annual compound rate = % (Round to two decimal places as needed.)arrow_forwardJane, who works for the economic research department in a multinational corporation, is preparing a report for the advisory board of the company. The report intends to clarify in which country they should invest given the expected change in demand. The objective is, of course, to identify the country with greater change in demand. Jane analyzes countries A and B that currently have the same demand. She calculates the partial derivatives of demand with respect to income and finds that for country A it is greater than for country B. Demand in country A is measured in pounds and in country B in Kg. Can we conclude that if the only change expected in both countries is a change in income of 3.5%, then the company should invest in country A? no, we should calculate instead the income elasticity for the consumption of the good the company sells in each country. There is no statistic that can illuminate the advisory board on this problem. yes, because the derivative tells us that for each…arrow_forward
- Suppose a(t) = 0.0015 (t-3)4 +0.042 (1-2)³ + 1.2145. Calculate values of a(t) and the effective rate of interest, i, for integer values of t from 0 to 50 (no need for an effective rate at t = 0). Then graph the values of the effective rates of interest Round the a(t) values to 3 decimal points and round the interest rates to 2 decimal in percentage form. pointsarrow_forwardIndicate which one of following statements is true for a coupon bond: A) When the price of a bond is above its par value, the yield to maturity is greater than the coupon rate. B) The yield to maturity and the price of a coupon bond are positively related. C) When the price of a coupon bond equals its face value, the yield to maturity equals the coupon rate. D) When the price of a bond is below its par value, the yield to maturity is less than the coupon rate Support your answer with the use of a formula and explain in detail all the assumptions you make and all the components you use. (You may also want to use a yield calculator to verify you answer).arrow_forwardFor each of the following pairs, which bond would you expect to pay a higher interest rate? Explain! a). a bond of the U.S. government or a bond of an East European government b). a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040 c). a bond from Coca-Cola or a bond from a software company you run in your garage d). a bond issued by the federal government or a bond issued by New York Statearrow_forward
- Dell Computer makes its suppliers wait 37 days on average to be paid for their goods; however, Dell is paid by its customers immediately. Thus, Dell earns interest on this float, the money that it is implicitly borrowing. If Dell can earn an annual interest rate of 4%, what is this float worth to Dell per dollar spent on inputs?arrow_forwardThe demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £) as a function of the price of the bond is S = 2P+ 400. What is the equilibrium interest rate?arrow_forwardYou are an investor currently holding 1.5 million U.S. dollars, and you are contemplating the following strategies. 1)Investing in the U.S. 5-year treasury bonds.2)Investing in the 5-year government bonds of one of the countries listed below. Your strategy is to exchange your funds on the spot market into the foreign currency, buy the local government bond, and after the bond’s maturity, exercise a forward to change your funds back into USD. Spot and forward rates are listed below. There are no put and call rates (the spread is equal to zero). The forward, however, costs 2% of the exchanged value.Required:1.Find the most profitable strategy. Calculate the future and present values of all 11 strategies (U.S. treasury bonds and 10 foreign government bonds).2.Explore the concept of arbitrage on the currency exchange markets and critically evaluate how it relates to this situation.arrow_forward
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