Question 1

If the interest rate is r and will remain r forever,then a bond that will pay 75 dollars a year forever,starting one year from now,is worth how much today?

Accepted Answer

A)  75/(1 + r)dollars. 
B)  75(1 + r)dollars. 
C)  75/(1 + r +r2 +..............+......... r n +.....)dollars. 
D)  75/r dollars. 
E)  None of the above.

Question 2

In a perfect asset market,it is known with certainty that an asset will sell for $24 in one year.If the annual interest rate is 10%,then the asset will sell for $26.40 right now.

Accepted Answer

A) True 
 B)False

Question 3

A consumer who can borrow and lend at the same interest rate should prefer an endowment with a higher present value to an endowment with a lower present value,no matter how he plans to allocate consumption over the course of his life.

Accepted Answer

A) True 
 B)False

Question 4

If the interest rate is 17%,and will remain 17% forever,how much would a rational investor be willing to pay for an asset that will pay him 7,020 dollars 1 year from now,1,368 dollars 2 years from now,and nothing at any other time?

Accepted Answer

A)  7,000 dollars 
B)  6,000 dollars 
C)  41,176.47 dollars 
D)  126,000 dollars 
E)  8,000 dollars

Question 5

The interest rate is 10% 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 $110.If it is redeemed after two years,the investor gets $117.70.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.

Accepted Answer

A) True 
 B)False

Question 6

Shivers's annual fuel bill for home heating is 800 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 800 dollars,plan B would cost him 1,100,dollars,and plan C would cost him 8,800 dollars.If the interest rate is 10% and his house and the insulation job last forever,which plan is the best for Shivers?

Accepted Answer

A)  Plan A. 
B)  Plan B. 
C)  Plan C. 
D)  Plans A and B are equally good. 
E)  He is best off using none of the plans.

Exam 11:Asset Markets-Part A

If the interest rate is r and will remain r forever,then a bond that will pay 75 dollars a year forever,starting one year from now,is worth how much today?

In a perfect asset market,it is known with certainty that an asset will sell for $24 in one year.If the annual interest rate is 10%,then the asset will sell for $26.40 right now.

A consumer who can borrow and lend at the same interest rate should prefer an endowment with a higher present value to an endowment with a lower present value,no matter how he plans to allocate consumption over the course of his life.

If the interest rate is 17%,and will remain 17% forever,how much would a rational investor be willing to pay for an asset that will pay him 7,020 dollars 1 year from now,1,368 dollars 2 years from now,and nothing at any other time?