MICROECONOMICS (LL) W/ CONNECT
21st Edition
ISBN: 9781260923933
Author: McConnell
Publisher: MCG
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Chapter 18, Problem 9DQ
To determine
The impact of usury laws on poor people.
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Q3)
(For the first 20 bond problems, assume interest payments are on an annual basis.)
Bond value (LO10-3) The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is
6 percent.
9 percent.
Suppose that you are obtaining a personal loan from your uncle in the amount of $20,000 (now) to be repaid in two years to cover some of your college expenses. If your uncle usually earns minimum 8% profit (annually) on his money, which is invested in various sources.
1) What minimum lump-sum payment two years from now would make your uncle happy?
2) If you pay yearly, how much should you pay each year?
3) If you pay every six months, how much should you pay every six months?
Label each of the following behaviors with the correct bias or heuristic. LO8.3 a. Your uncle says that he knew all along that the stock market was going to crash in 2008. b. When Fred does well at work, he credits his intelligence. When anything goes wrong, he blames his secretary. c. Ellen thinks that being struck dead by lightning is much more likely than dying from an accidental fall at home. d. The sales of a TV that is priced at $999 rise after another very similar TV priced at $1,300 is placed next to it at the store. e. The sales of a brand of toothpaste rise after new TV commercials announce that the brand “is preferred by 4 out of 5 dentists.”
Chapter 18 Solutions
MICROECONOMICS (LL) W/ CONNECT
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- 15. Consider a government bond with a face value of $10 000, and a present value of $9500. If this bond is offered for sale at $9600, then the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $9500. individuals will purchase the bond at the offer price which will drive the market rate of interest down. the equilibrium market price of this bond has been achieved. the excess demand for the bond at $9600 will drive the price up to the face value of the bond. individuals will purchase the bond at the offer price which will drive the market rate of interest uparrow_forward14. Is there a “natural” rate of interest? What does it mean and what determines it? Is there a curve such as the Phillips curve for the real rate of interest? Discuss. 15. Why does the real interest rate fluctuate over the business cycle? Can monetary factors change it? Discuss. 16. Are the loanable funds and liquidity preference theories of the rate of interest consistent with (i) interest rate targeting, (ii) the Taylor rule? If not, how can they be made consistent?arrow_forwardSuppose that workers can go to firms without training and earn $40,000 per year for the remainder of their work life (suppose that is 30 years). Assume a zero-interest rate. Further, suppose that Gritz Ltd. (a fictional employer) provides firm specific training at a cost of $25,000 in the first year and the worker produces nothing during that first year. The training will increase the worker's productivity to $45,000 in years 2-30. If Gritz Ltd. pays workers $40,000 per year for 30 years and can force workers to stay for 30 years, should it increase or decrease the number of workers to maximize profits? Explain the numerical basis for your conclusion. b) If Gritz Ltd. cannot force workers to stay for the 30 years, how should it structure pay to increase the chance that the worker will stay? How will this achieve the desired objective?arrow_forward
- 54) If a higher inflation is expected, what would you expect to happen to the shape of the yield curve? Why? 55) What is the shape of the yield curve when short rates are expected to fall in the medium term, and then increase? Demonstrate this graphically. 56) What is the shape of the yield curve when short-term rates are expected to rise sharply in the mid-term and moderately in the long-term? 57) When interest rates on 1-2-3-4-5 year bonds are 2.0, 2.1, 2.3, 2.4, and 2.5 percent respectively, what information do we derive on future economic growth and real output?arrow_forwardSuppose that the interest rate at which Joanne can borrow and lend is 10 percent per year, but she can earn $22,000 with a high school degree. Her tuition and books at college cost $6,000 and her living expenses are $15,000 per year. Savings are deposited at the end of the year they are earned and receive (compound) interest at the end of each subsequent year. Similarly, the loans are taken out at the end of the year in which they are needed, and interest does not accrue until the end of the subsequent year. Now that the interest rate has risen, should Joanne go to college or go to work?arrow_forwardHow much would you pay for a perpetual bond that pays an annual coupon of $200 per year and yields on competing instruments are 5%? You would pay $. (Round your response to the nearest penny.) Part 2 If competing yields are expected to change to 8%, what is the current yield on this same bond assuming that you paid $4,000? The current yield is %.(Round your response to the nearest integer.) Part 3 If you sell this bond in exactly one year, having paid $4,000, and received exactly one coupon payment, what is your total return if competing yields are 8%? Your total return is %.arrow_forward
- If the inflation rate is 3 percent and the nominal interest rate is 8 percent, how much is the after-tax real interest rate if the government imposes a 20 percent interest income tax? O a. 3.4 percent O b. 4 percent O c. None of the above O d. 5.4 percent.arrow_forward4. Does the I in C+I+ G Nx include purchases of stocks and bonds? Why or why not? Lo2 t nnmnonent of I inarrow_forwardSuppose that the demand for laonable funds for car in the Milwaukee area is $11million per month at an interest rate of 10 percent per year, $12million at an interest rate of 9 percent per year, $13million at an interest rate of 8 percent per year and so on. a. If the supply of loanable funds is fixed at $17million, what will be the equilibrium interest rate? b. If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be? c. How big will the monthly shortage for car loans be if the usury limit is raised to 7 percent per year?arrow_forward
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