Exam 11:Asset Markets-Part A

Bank 1 offers a deal on deposits of $1,000 or more.You must leave your money in the bank for three years,but bank 1 will pay you 8% interest for the first year,8% interest for the second year,and 7% interest for the third year.In response,bank 2 offers a deal that it claims is even better.It also requires you to deposit at least $1,000 and to leave it in the bank for three years,but it will pay 12% interest in the first year and then 8% in the second and third year.After three years,you can take your money out of either bank and do what you want with it.Both banks compound interest annually.

The sum of the terms of the infinite geometric series 1,0.85,0.85²,0.85³,... ,is closest to which of the following numbers?

If the rate of inflation is greater than the interest rate,

If everybody has the same information,then a well-functioning market for assets would,in equilibrium,leave no opportunities for arbitrage.

Ashley,from your workbook,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 6%.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?

The interest rate is 10% and is expected to stay constant at that level forever.The present discounted value of $50,000 a year forever starting today is

Suppose that the cost of personal computers falls by 20% per year.To make this problem relatively easy,we will assume that their quality does not change and that computers never wear out.You plan to get one sometime.What is the rational way to decide when to buy one?

The sum of the terms of the infinite geometric series 1,0.86,0.86²,0.86³,... ,is closest to which of the following numbers?

A large (subterranean)pool of oil lies in a remote region of Ohio.Oil companies have explored this region and know how much oil there is.They have purchased the rights to drill and extract oil when they wish to do so.Because of the extremely forbidding geography and the savagery of the natives,the companies have decided to postpone extraction until the price of oil is higher.The theory of intertemporal arbitrage predicts that

You buy a painting for $1,280.Its market value will rise by $80 per year for the next 30 years.It is worth $80 a year to you to have it hanging on the wall.The interest rate is 10%.In how many years will you sell it?

The interest rate is 10% and will remain so forever.You do not drink wine but are interested in buying some for investment purposes.Assume that there are no transactions costs or storage costs and that a certain bottle of wine will be worth $44 one year from now,$51 two years from now,and $55 three years from now.After that it turns to worthless vinegar.How much should you be willing to pay for a bottle? (Pick the closest answer. )

Vincent Smudge's paintings are unappreciated now.Nobody is willing to pay anything to have them on the walls.In 5 years Smudge's work will gain enduring popularity.People will suddenly be willing to pay $1,000 a year to have an original Smudge on their walls and will continue to be willing to do so ever after.If investors realize that this is the case and if the interest rate is and always will be r,a painting by Smudge will currently be worth about

Suppose that the cost of cutting down a tree is zero and the tree grows on land that is useless for anything else,that the interest rate is constant,and that the price of lumber does not change.The optimal time to cut the tree is when the difference between its growth rate and the interest rate is maximized.

Shiver's annual fuel bill for home heating is 900 dollars per year.He considers three alternative plans for insulating his house.Plan A would reduce his annual fuel bill by 15%,plan B would reduce it by 20%,and plan C would eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 900 dollars,plan B would cost him 1,600 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?

Bank 1 offers a deal on deposits of $1,000 or more.You must leave your money in the bank for three years,but bank 1 will pay you 4% interest for the first year,4% interest for the second year,and 7% interest for the third year.In response,bank 2 offers a deal that it claims is even better.It also requires you to deposit at least $1,000 and to leave it in the bank for three years,but it will pay 7% interest in the first year and then 4% in the second and third years.After three years,you can take your money out of either bank and do what you want with it.Both banks compound interest annually.

According to a recent story in the New York Times,the South African gold strike has been costing South African mining companies about $7.5 million per day.Assuming that this number is the value of the gold that was not mined because of the strike,minus the labor costs (and other operating costs)that are saved by shutting down the mines,what is wrong with this calculation?

The interest rate is 10% and will remain so forever.You do not drink wine but are interested in buying some for investment purposes.Assume that there are no transactions costs or storage costs and that a certain bottle of wine will be worth $55 one year from now,$58 two years from now,and $64 three years from now.After that it turns to worthless vinegar.How much should you be willing to pay for a bottle? (Pick the closest answer. )

Ashley,from your workbook,has discovered another wine,wine D.Wine drinkers are willing to pay 40 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 20 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. )

Art Dreck's paintings are terribly unpopular now.In fact nobody would pay a dime to have one of his paintings on the wall now.But experts believe that 10 years from now,there will be a craze for Dreck paintings.The craze will last for 2 years and then nobody will ever want to see a Dreck again.During this 2-year period,people will be willing to pay $1,100 a year to have an original Dreck on the wall.The interest rate is r.If the experts' belief is widely held among investors,today's market value of Dreck should be about