Exam 10: A: Asset Markets

A bond has a face value of 1,000 dollars. It will pay 100 dollars in interest at the end of every year for the next 44 years. At the time of the final interest payment, 44 years from now, the company that issued the bond will redeem the bond at face value. That is, the company will buy back the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 60 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

The price of an antique is expected to rise by 8% during the next year. The interest rate is 10%. You are thinking of buying an antique and selling it a year from now. You would be willing to pay a total of 800 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay to buy this antique? (See Problem 5.)

A bond has a face value of 1,000 dollars. It will pay 100 dollars in interest at the end of every year for the next 42 years. At the time of the final interest payment, 42 years from now, the company that issued the bond will redeem the bond at face value. That is, the company will buy back the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

The sum of the terms of the infinite geometric series 1, 0.93, 0.93², 0.93³, . . . is closest to

The sum of the terms of the infinite geometric series 1, 0.78, 0.78², 0.78³, . . . is closest to

The sum of the terms of the infinite geometric series 1, 0.95, 0.952, 0.953, . . . is closest to

A bond has a face value of 4,000 dollars. It will pay 400 dollars in interest at the end of every year for the next 40 years. At the time of the final interest payment, 40 years from now, the company that issued the bond will redeem the bond at face value. That is, the company will buy back the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth. But Shivers has a larger house. Shivers's annual fuel bill for home heating is 900 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers 900 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 9,900 dollars. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

A bond has a face value of 2,000 dollars. It will pay 200 dollars in interest at the end of every year for the next 42 years. At the time of the final interest payment, 42 years from now, the company that issued the bond will redeem the bond at face value. That is, the company will buy back the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

The sum of the terms of the infinite geometric series 1, 0.78, 0.78², 0.78³, . . . is closest to

If the interest rate is 6% and will remain 6% forever, how much would a rational investor be willing to pay for an asset that will pay him 8,480 dollars 1 year from now, 1,123 dollars 2 years from now, and nothing at any other time?

Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 45 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

The price of an antique is expected to rise by 4% during the next year. The interest rate is 9%. You are thinking of buying an antique and selling it a year from now. You would be willing to pay a total of 400 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay to buy this antique? (See Problem 5.)

The price of an antique is expected to rise by 6% during the next year. The interest rate is 7%. You are thinking of buying an antique and selling it a year from now. You would be willing to pay a total of 600 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay to buy this antique? (See Problem 5.)

A bond has a face value of 10,000 dollars. It will pay 1,000 dollars in interest at the end of every year for the next 48 years. At the time of the final interest payment, 48 years from now, the company that issued the bond will redeem the bond at face value. That is, the company will buy back the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth. But Shivers has a larger house. Shivers's annual fuel bill for home heating is 700 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers 700 dollars, plan B would cost him 1,200 dollars, and plan C would cost him 7,700 dollars. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 30 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 70 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 10 dollars each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

The price of an antique is expected to rise by 5% during the next year. The interest rate is 10%. You are thinking of buying an antique and selling it a year from now. You would be willing to pay a total of 500 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay to buy this antique? (See Problem 5.)