Exam 16: Interest Rates, Investments, and Capital Markets

You can put your $100 in Bank A that pays 8% at the end of the year.You can also put your $100 in Bank B that pays 4% at the end of six months and then 4% again at the end of the year.You will keep your $100 and all interest in the bank.At the end of the year

Suppose that your college offers you two payment plans.You may either pay tuition of $10,000 per year at the beginning of each of the next four years,or pay just $38,000 before the start of freshman year.If the interest rate is 10%,what would you do? If the interest rate were 2%,what would you do? Intuitively explain the difference in your answer.

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.Which of the following makes it more likely that Joe will decide to go back to college full-time?

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.If these are real amounts (adjusted for inflation),then the discount rate to be used should be

Billy is considering the purchase of a rental house.The house costs $240,000 and it will generate annual revenues of $15,000 and annual expenses of $3,000.What is the internal rate of return of this investment?

With respect to events like global warming some economists suggest using falling discount rates because

Government debt increases the interest rate and private investment.

Suppose a person has a discount rate of zero.This implies she

You sign a contract to pay $1000 next year for the refrigerator you bought today.The rate of inflation is 10% and the real interest rate is 7%.Alternatively,you could pay $875 today.What should you do to save the most money?

If a bond's coupon adjusts to pay a constant real rate of return,then an increase in inflation would cause

As in all other competitive markets price equals marginal cost in a market for a scarce,non-renewable resource that is traded in a competitive market.

Government borrowing may crowd out borrowing by private interests because

If the interest rate is positive,the future value of an interest bearing investment is always larger than the present value.

Why is the price of a scarce exhaustible resource in a competitive market above the marginal cost of providing a unit of the resource?

An exhaustible resource with a very large known reserve will most likely exhibit

If the interest rate is 10%,then $1 received one year from now is worth how much today?

Jerry wishes to retire in 5 years with $1 million in his bank account.If the account pays 4% and his current balance is $500,000,how much must he deposit at the beginning of each of the next five years for his wish to come true? The amount must be the same each year.

Suppose an astronomer discovers gold on the moon.Would this gold add to the world reserves?

Suppose an exhaustible resource can be sold only this period or next period.The resource owner is considering selling 100 tons of the resource this period.The future value of the resource when 100 tons are sold this period is less than the present value of the 100 tons sold this period multiplied by one plus the interest rate.What should the resource owner do?

The question "What are you going to do with that major?" implicitly questions