Exam 11:Asset Markets-Part A

A bond has a face value of 5,000 dollars.It will pay 500 dollars in interest at the end of every year for the next 45 years.At the time of the last interest payment,45 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?

If the interest rate is r and will remain r forever,then a bond that will pay 95 dollars a year forever,starting one year from now,is worth how much today?

If the interest rate is 18%,and will remain 18% forever,how much would a rational investor be willing to pay for an asset that will pay him 9,440 dollars 1 year from now,1,392 dollars 2 years from now,and nothing at any other time?

The interest rate is 9% and there is no inflation.A bond is available that can be redeemed either after one year or after two years.If it is redeemed after one year,the investor gets $109.If it is redeemed after two years,the investor gets $115.54.The investor gets no other payments than what she receives when she redeems the bond.In equilibrium,investors will be willing to pay more than $100 for this bond.

Today is January 1.The interest rate is 8% and investors are convinced that it will stay at 8% for the next 10 years.A corporate bond comes on the market that for the next 7 years will pay $160 on December 31 to whoever owns the bond on that date.On January 1,7 years from today,the issuer of the bond will redeem the bond by buying it back from the bondholder for $2,000.What should this bond sell for?

The interest rate is 10% and will remain 10% forever.Suppose that you do not drink wine but are interested in buying it for investment purposes.How much would you be willing to pay for each of the following? a.A bottle of wine that will be worth $22 a year from now and will then go bad and be worthless. b.A bottle of wine that will be worth $22 a year from now and will rise in value by $1 a year forever? Explain your answer.

A certain wine costs $3 a bottle to produce.It improves in taste if stored properly for a period of time.When it is newly bottled,people are willing to pay only $2 a bottle to drink it.But the amount that people are willing to pay to drink a bottle of this wine will rise by $3 a year for the next 50 years.Storage costs,not including interest,are $.50 per year.If the interest rate is 5% and the wine is kept by rational investors,how old will it be when it is drunk and what will be its price at that time?

The interest rate will be 10% for one more year,but a year from now,it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $440 a year forever,starting two years from today?

A bond has a face value of 7,000 dollars.It will pay 700 dollars in interest at the end of every year for the next 50 years.At the time of the last interest payment,50 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 interest rate will be 10% for one more year,but a year from now,it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $220 a year forever,starting two years from today?

Suppose that a dispute in the Persian Gulf halts the sale of oil from the Persian Gulf for one year.At the same time an important new oil field is found in a place where nobody expected there to be oil.What does economic theory predict will be the effect on the future price of oil to be delivered two years from now?

The interest rate is 10%.A certain piece of land can be used for a parking lot,in which case there are no construction costs and it will yield a net return of $5,000 per year forever starting one year from now.Or it can have a house built on it.Building a house would cost $50,000 now.If a house is built on the lot,it will yield a stream of net income equal to $12,000 per year starting one year from now.No other uses are contemplated.The theory of asset markets predicts that the lot will sell for

A zero coupon bond is a bond that pays no return until it comes due and then pays the holder of the bond its face value.Suppose that a $4,000 zero coupon bond will come due on January 1,2020.If the interest rate is 5% and will remain 5% forever,what will this bond be worth on January 1,2005?

A zero coupon bond is a bond that pays no return until it comes due and then pays the holder of the bond its face value.Suppose that a $2,000 zero coupon bond will come due on January 1,2020.If the interest rate is 5% and will remain 5% forever,what will this bond be worth on January 1,2005?

The price of an antique is expected to rise by 8% during the next year.The interest rate is 12%.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?

The amount people are willing to pay to drink a bottle of a certain vintage of wine when it is t years old is $2 + 3t.It costs $.50 a bottle per year to store this wine.The interest rate is 5%.If the annual cost of storing the wine rises to $1,what will be the effect on the price of this wine when it is consumed and on the length of time for which it is stored before it is consumed?

If the nominal interest rate is 80% and the rate of inflation is 50%,then the exact real rate of interest is

If the interest rate is 10%,then an asset that returns $1 a year forever is worth $1/1.1.

According to the theory of asset markets,if the interest rate is constant,then the competitive market price of a bottle of wine will rise at a constant rate per year until it is consumed,even if the amount that wine drinkers are willing to pay for it does not rise at a constant rate.

A certain wine costs $3 a bottle to produce.The amount that people are willing to pay to drink it t years after it has been bottled is $2 +3t.Storage costs,not including interest,are $.50 per year.If the interest rate is 5%,how much would a rational investor be willing to pay for it at the time it is bottled? Explain how you got your answer.Feel free to write formulas for present value calculations without working out the numerical answer if it involves long calculations.(Hint: How long would the wine be kept before it is drunk? At what price would it sell?)