ECON 2560 Chapter Notes - Chapter 5: Interest, Interest Rate, Tampereen Pallo-Veikot

48 views6 pages

maroonmoose340

24 Jul 2014

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Present values: present value (pv) , r = discount rate, pv = discounted value r. = discount factor or pvif (r,t: alternate pv = future payment x. = 8958. 68: better value than the required by the other auto. Finding the interest rate: rearrange: pv = 1000 x 1/(1+r)^47 = 94. 40. Finding the investment period: for example, if we know 3000 x. 1 (1. 08 )t =1890: solve for t - pv(. 08,t) = 3000: set discount factor to (1. 08)^-t = . 6300, log (1. 08)^-t = log . 6300, -t log 1. 08 = log . 6300, t = -log . 6300/log 1. 08 = 6. 003. Multiple cash flows: first i x (1+r)^total period left + second i x (1 + r)^totalperiod left etc. = tfv: present value of multiple cash flows, say you make 3 payments over three years. First payment + (second payment/(1+r) + (third payment/(1+r)^period) = 1 (1+r)start of payout 1: how to value annuities. Present value of t year annuity=c x [ 1 r.

Related Questions

Monetary Policy and Inflation: Use our standard Keynesian macroeconomic model:

â¢ Y = E = C + I + NX + G â GDP equals the sum of consumption, investment, net exports, and government purchases
â¢ C = c0 + cy x Y â consumption equals the consumer-confidence term plus the mpc times GDP or income
â¢ I = I0 - Ir x r â business investment spending equals the business animal-spirits term minus the interest sensitivity of investment times the long-run real risky interest rate
â¢ Î¼ = 1/(1 - cy) â the multiplier is the inverse of one minus the mic
â¢ Y = Î¼(c0 + I0 + NX) - (Î¼ Ir) x r + Î¼G â our summing-up equation, telling us how the level of annual GDP depends on the multiplier Î¼, on the private spending flows c0 + I0 + NX, on the
interest-sensitivity parameter Ir, on the interest rate r, and on government purchases G

For this problem, assume a value of the Keynesian multiplier of Î¼ = 2, and with Ir, the sensitivity of investment spending I to the interest rate r, such that Ir = $0.15T. And letâs use the Greek letter Îâcapital deltaâas a shorthand symbol for changes from the previous equilibrium situation.

The Federal Reserve controls the short-term safe interest rate on government securitiesâit can nail that value to whatever it wants by buying and selling bonds for cash. We call this interest rate i. But the interest rate that matters for determining investment spending is the long-term real risky interest rate at which banks lend to companies. We call this interest rate r.

a) Suppose that the interest rate r that matters for investment spending falls by 1.5%-pts:
Îr = -1.5
By how much would you expect investment spending to fall given the parameter values of our model? How large is ÎI?

b) Continue your analysis from (a): given the parameter values of our model and the boosting of investment spending you calculated in (a), by how much would you expect GDP Y to grow?

c) Annual real GDP in the mid-2000s was about $15T. How large is this boost to GDP ÎY you calculated in (b) as a percentage of the then-level of real GDP?

d) On average, a 1% extra boost to GDP is associated with a 1.5% extra decrease in the unemployment rate. By how much extra would you expect the unemployment rate to fall as a
result of the boost to GDP you calculated in (b) and (c)?

e) Suppose that with the interest rate decline the unemployment rate falls from 6% to 4.5%. What would the unemployment rate have been without this interest-rate decline?

f) Suppose that real GDP had been lower for each of three years by the amount you calculated in (b). How much poorer would Americans have been in terms of reduced income over those three years had the interest rate r not fallen?

g) In an America with about 135 million workers, how much is this lost income per worker?

ochredonkey719

The following are all True and False Questions:

1. Book Value represents the remaining underpreciated investment on the books after the depreciation charges to date have been subtracted

2. For the same interest rate, compounding interest does not always yield a larger future worth value than a simple interest rate

3. For any project, if its present worth is negative, the project will be rejected

4. The capatalized cost of a finite-life alternative can be obtained by calculating its annual worth over one life cycle and then multiplying by the interest rate

5. The depreciation amount is not directly included in CFBT (Cash Flow Before Tax), but depreciation is directly invlolved in the taxable calculation

6. Using incremental analysis of alternatives, the alternatice with the highest B/C ratio is selected.

7. Plotting PW vs i can be used to determine the IRR for a given project.

8. In conducting an incremental analysis, at any round, two alternatives can be compared and the alternative with the highest internal rate of return can be selected for comparison in the next round.

You have $35,259.87 in a brokerage account, and you plan to deposit an additional $2,500 at the end of every future year until your account totals $350,000. You expect to earn 11.7% annually on the account. How many years will it take to reach your goal? Round your answer to the nearest whole number.

2)What is the future value of a 10%, 5-year ordinary annuity that pays $550 each year? Round your answer to the nearest cent.

If this were an annuity due, what would its future value be? Round your answer to the nearest cent.

3)An investment will pay $100 at the end of each of the next 3 years, $300 at the end of Year 4, $500 at the end of Year 5, and $700 at the end of Year 6. If other investments of equal risk earn 9% annually, what is its present value? Round your answer to the nearest cent.

What is its future value? Round your answer to the nearest cent.

4)You want to buy a car, and a local bank will lend you $10,000. The loan would be fully amortized over 6 years (72 months), and the nominal interest rate would be 10%, with interest paid monthly. What is the monthly loan payment? Round your answer to the nearest cent.

What is the loan's EFF%? Round your answer to two decimal places.

Present and Future Values of Single Cash Flows for Different Periods

Find the following values, using the equations, and then work the problems using a financial calculator to check your answers. Disregard rounding differences. (Hint: If you are using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can "override" the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer. This procedure can be used in parts b and d, and in many other situations, to see how changes in input variables affect the output variable.)

An initial $800 compounded for 1 year at 5.6%. Round your answers to the nearest cent.

$
An initial $800 compounded for 2 years at 5.6%. Round your answers to the nearest cent.

$
The present value of $800 due in 1 year at a discount rate of 5.6%. Round your answers to the nearest cent.

$
The present value of $800 due in 2 years at a discount rate of 5.6%. Round your answers to the nearest cent.

coralwolf381

ECON 2560 Chapter Notes - Chapter 5: Interest, Interest Rate, Tampereen Pallo-Veikot

Document Summary

Get access

Related Documents

ECON 2560 Chapter Notes - Chapter 5: Discounting, Cash Flow, Real Interest Rate

ECON 2560 Study Guide - Midterm Guide: Dividend Tax, The Globe And Mail, Dividend Discount Model

ECON 2560 Study Guide - Midterm Guide: Dividend Discount Model, Initial Public Offering, Cash Cash

Related Questions