ECO100Y5 Chapter Notes - Chapter 28: Output Gap, Capital Outflow, Potential Output

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Chapter 28- money, interest rates, and economic activity. Pv= r1/(1+i: a sequence of future payments. The higher interest rate implies that any future payments are discounted at a higher rate and thus have a lower present value: a general relationship. The present value of any bond that promises a future payment or sequence of future payments is negatively related to the market interest rate. Bond riskiness: an increase in the riskiness of any bond leads to a decline in its expected present value and thus to a decline in the bond"s price; the lower bond price implies a higher bond yield. 28. 2 the theory of money demand: demand for money- the total amount of money balances that the public wants to hold for all purposes. Cost of holding money is the income that could have been earned if that wealth were instead held in the form of interest earning bonds opportunity cost of holding money.

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I am having problems with this problem from my Econcoursework. Iunderstand how to do parts 1 and 2, but amhaving trouble with parts3 and 4. For part 3, how do I dothe calculation for an infiniteperiod? As the time becomeslonger the present value goes to zero,so do i assume a period, oris there an actual method for infiniteperiods? For part 4,do I simply do the sum for the future value andplug it into thePresent value equation? Not really looking for thesolutionhere, but I need some help getting the third and fourthpartssolved.

Congratulations! You just won the lottery! You can elect toreceiveyour prize in one of four
payment streams:
(i) $1,000,000 now
(ii) $1,500,000 at the end of five years
(iii) $60,000 per year in perpetuity (for ever), with paymentsmadeat the end of each year (so your
first payment comes one year from today)
(iv) $150,000 per year for the next ten years, with payments madeatthe end of each year (so your
first payment comes one year from today)

Suppose the annual interest rate is 5% with certainty andinperpetuity. Calculate the present value of
each of the four payment options (i.e., in todayâs dollars).Rankfor four options from most to least
valuable. You can use Excel or a calculator to solve this, butyoumust show the formulas you use.

This assignment requires the following knowledge: For k different events, if the probability that each of them happens is p (0 < p < 1) and all events happen independently, the probability that all events happen together is p^k.
1. Five firms, namely A, B, C, D and E, issue discounted bonds with face value $1,000 and maturity 5 years in the market. All firms are pretty risky and each of them has a chance of 0.5 of collapse during the five years (thus bankrupted and can not pay back the bond accordingly). The bonds are all sold at an interest rate of 50% (the value is not surprising due to the extremely high risk of default).
(1) What is the present value of the bond given the interest rate, the face value and the maturity? Hint: we temporarily do not consider the issue of default.
(2) Say now you buy one bond from each of the five firms, what is the total amount you lend out today? Eventually only one firm does not fail and pays back the bond, what is the money you collect back 5 years later? You gain or loss in this case? If more than one firm pays back the bond, will you get more money back?
(3) What is the chance (probability) that you get nothing back assuming that firms fail independently? Together with the answer in (2), is it a good deal to buy one bond from each of the five firms?
(4) Repeat (2) and (3) with the only difference that now you buy 5 bonds from a single firm.
(5) Now we assume that the five firms all have similar businesses in Greece (and those are their only businesses), therefore, all firm fail together if the economy in Greece fails. Will you answer in (3) change?

True or False

Since no one party owns a not-for-profit hospital, physicians really own the hospitalâs business.

The value of any capital project can be assessed by estimating expected future cash flows from the project and discounting them to the present value. This procedure accounts for the time value of money.

Consumer cooperatives have a long and successful history in development of the HMO.

For-profit firms make up the bulk of hospital organizations.

Kaiser Health Plan is the only HMO in the U.S. to consistently maintain its core competencies. That is, it has kept client satisfaction high, while keeping the growth rate of premiums higher than the growth rate of medical costs.

When Allegheny Hospital System (AHERF) went bankrupt, the price of borrowing for all hospitals increased. This is an example of correlated system risk.

It could be argued that the federal and state governments provide an implicit guarantee of hospital borrowings because revenue from Medicare and Medicaid patients is assumed to be guaranteed.

Venture capitalists are entrepreneurs who specialize in high-risk investments. Often they are the only available source of financing for small startup biotech companies, which very rarely are able to obtain bank loans to finance their research.

One of the most important things an HMO should do to stay profitable is to make sure a) the medical costsâ rate of growth is below the rate of growth of premiums (revenues), and b) customer satisfaction does not slip.

Research studies indicate that when a non-profit healthcare organization is converted to a for-profit status, it might lead to higher prices and a reduction in the number of services offered, if the converting organization had significant monopolistic market power in that geographical area.

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ECO100Y5 Chapter Notes - Chapter 28: Output Gap, Capital Outflow, Potential Output

ECO100Y5 Full Course Notes

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