EC140 Lecture 14: EC-140 Lecture 14

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27 Feb 2017

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How valuable is a future payment: equal in value to the amount of money you need now to ensure yourself that payment in the future. How valuable is a sequence of payments: value each one, and add them up. What happens if interest rates increase: present value falls. If market price is greater than present value quantity demanded is near zero. If market price is less than present value quantity demanded is very high. Prices adjust until market value is equal to present value of a bond. Two key features: present value negatively related to interest rates, market price equals present value. Increases in interest rates reduce price of bonds: a lower price implies a higher rate of return, or bond yield. Yield equalizes over similar bonds: bonds at similar risk/maturity, will have similar yield (price adjusts to match coupon rate) Yield curve or term structure: bonds maturing earlier have lower yields, opportunity cost of tying up money.

Related Questions

6. If there is a shortage of loanable funds, then

a.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
b.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
c.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
d.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

7. We associate the term debt finance with

a.	the bond market and we associate the term equity finance with the stock market.
b.	the stock market and we associate the term equity finance with the bond market.
c.	financial intermediaries and we associate the term equity finance with financial markets.
d.	financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.	and the quantity of loanable funds rises.
b.	and the quantity of loanable funds falls.
c.	rises and the quantity of loanable funds falls.
d.	falls and the quantity of loanable funds rises.

9. Long-term bonds are

a.	riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
b.	riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
c.	less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
d.	less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.	face higher risk and have the potential for higher returns.
b.	face higher risk but receive a fixed payment.
c.	face lower risk and have the potential for higher returns.
d.	face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket', is very similar to a modern bit of advice concerning financial matters:

a.	Buy low-risk bonds.
b.	Use a medium of exchange.
c.	Diversify.
d.	Intermediate.

12. A budget surplus is created if

a.	the government sells more bonds than it buys back.
b.	the government spends more than it receives in tax revenue.
c.	private saving is greater than zero.
d.	None of the above is correct.

greenwildebeest673

Question 1.

a. What is the difference between interest rates and returns on a bond? Is the RET equal to the interest rate? Why or Why not?

b. What would be the rate of return on a coupon bond bought at face value of $1000 today( with a coupon rate of 15%) and sold for $1200 one year later ?

c. What is the method to calculate the rate of Capital Gain (g)? Is there a capital gain or loss in the above cae? How much?

Question 2.

Explain why you would be more or less willing to buy long-term Government bonds under the following scenarios: Use a demand and supply analysis for bonds, with a given initial equilibrium in the bonds market. ( Diagram necessary)

a.Trading in these bonds increases, making them easier to sell.

b.Relative risk of these bonds compared to other types falls

c.Suppose government has a surplus

Question 3.( Diagram nesscesary)

a. What is the distinction between Real and Nominal Interest rates?

b. Suppose we have an equilibrium in the bonds market with a given expected inflation (he). If inflation rate increases, What will happen to the demand and supply of bonds? Would you be able to say for sure (i.e. with certainty) what will happen to the price of bonds and what will be the quantity bought and sold? Why or why not?

Question 1

If economic profits are zero

		accounting profits is less than the cost of capital.
		accounting profit is just covering the cost of capital.
		the cost of capital is negative.
		the entrepreneur should go to his/her next best alternative.

3 points

Question 2

Markets provide

information.

prices.

incentives.

all of these choices.

3 points

Question 3

The entrepreneur is always searching for

positive profit.

normal profit.

accounting profit.

economic profit.

3 points

Question 4

Social regulations can create

a more competitive market place.

network externalities.

a lower HHI.

barriers to entry.

3 points

Question 5

According to economic theory, profits are maximized where

total revenue equals total cost.

marginal revenue equals marginal cost.

price and average cost are equal.

where marginal product and average cost are equal.

3 points

Question 6

Brand names help

create commodities.

maintain market power.

create competition.

keep economic profits at zero.

3 points

Question 7

Entry of new firms causes

accounting profits to go to zero.

market share to grown.

economic profits to go to zero.

total revenue to be maximized.

3 points

Question 8

Fixed costs

do not vary with output

vary with output

do not vary with price

vary with price

3 points

Question 9

Variable costs

do not vary with price.

do not vary with output.

vary with price.

vary with output.

3 points

Question 10

Value maximization means

		that managers make decision so as to increase the long-run market value of the financial claims on the firm.
		that a firm should make products that have the highest price.
		that managers make decision so as to increase the short-run market value of the financial claims on the firm.
		all of these choices.

3 points

Question 11

A manager can determine if her product is viewed as a normal good or an inferior good by considering

price elasticity.

cross elasticity.

income elasticity.

advertising elasticity.

3 points

Question 12

If demand is perfectly elastic,

		the smallest increase in price will cause quantity demanded to fall to zero.
		the smallest increase in price will cause demand to fall to zero.
		the smallest increase in price will cause quantity demanded to fall.
		the smallest increase in price will cause demand to fall.

3 points

Question 13

If demand is perfectly elastic, then

demand and price are inversely related.

quantity demanded and price are inversely related.

the demand curve is a vertical line.

the demand curve is a horizontal line.

3 points

Question 14

If price elasticity is 3.25 then

		for every one percent change in price, there will be a 3.25 percent change in quantity demanded.
		for every one percent change in price, there will be a 3.25 percent change in demand.
		for every one percent change in price, there will be a 32.5 percent change in quantity demanded.
		for every one percent change in price, there will be a .0325 percent change in quantity demanded.

3 points

Question 15

If price elasticity is 3.25, then demand is

inelastic.

elastic.

unitary.

negative.

EC140 Lecture 14: EC-140 Lecture 14

EC140 Full Course Notes

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Related Questions

		positive profit.
		normal profit.
		accounting profit.
		economic profit.

		a more competitive market place.
		network externalities.
		a lower HHI.
		barriers to entry.

		total revenue equals total cost.
		marginal revenue equals marginal cost.
		price and average cost are equal.
		where marginal product and average cost are equal.

		create commodities.
		maintain market power.
		create competition.
		keep economic profits at zero.

		accounting profits to go to zero.
		market share to grown.
		economic profits to go to zero.
		total revenue to be maximized.

		do not vary with output
		vary with output
		do not vary with price
		vary with price

		do not vary with price.
		do not vary with output.
		vary with price.
		vary with output.

		price elasticity.
		cross elasticity.
		income elasticity.
		advertising elasticity.

		demand and price are inversely related.
		quantity demanded and price are inversely related.
		the demand curve is a vertical line.
		the demand curve is a horizontal line.

		information.
		prices.
		incentives.
		all of these choices.

		inelastic.
		elastic.
		unitary.
		negative.