ECON 1110 Chapter Notes - Chapter 28: Capital Outflow, Canadian Dollar, Human Capital

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jadekangaroo201

8 Apr 2016

School

University of Windsor

Department

Economics

Course

ECON 1110

Professor

Peter Miller

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Document Summary

Present value (pv) the value now of one or more payments or receipts made in the future; often referred to as discounted present value. Pv = r1 / 1 + i. The present value of any bond that promises a future payment or sequence of future payments is negatively related to the market interest rate. The present value of a bond is the most someone would be willing to pay now to own the bond"s future stream of payments. The equilibrium market price of any bond is the present value of the income stream that is produces. An increase in the market interest rate leads to a fall in the price of any given bond. A decrease in the market interest rate leads to an increase in the price of any given bond. An increase in the market interest rate will reduce bond prices and increase bond yields.

Related Questions

139.The present value of a future payment increases if the:
A) period between the present and the future increases.
B) future payment decreases.
C) interest rate decreases.
D) stock market falls

140. The present value of a future payment decreases if the:
A) period between the present and the future increases.
B) future payment increases.
C) interest rate decreases.
D) stock market rises.

141. The present value of future payments depends on:
A) the size of the payment.
B) the length of the time period.
C) the interest rate.
D) all of the above.

142. Given an interest rate of 3 percent, the present value of afuture payment of $2,080 to be paid in one year is:
A) $1,904.76
B) $2,000.00
C) $2,019.42
D) $2,080.00

Market shares of chocolate makers are in the table.

Firm	Market share (percent)
Mayfair, Inc	15
Bond, Inc	10
Magic, Inc	25
All Natural, Inc	10
Truffles, Inc	25
Gold, Inc	15

a. Calculate the four firm concentration ratio.

b. Calculate the Herfindahl-Hirschman Index.

5. If the interest rate is 6 percent, what is the present value of a bond that matures in two years, pays $85 one year from now and $1,085 two years from now?

6. Suppose that eLake, an online auction site, is paying a dividend of $2 per share. You expect this dividend to grow 4 percent per year, and the interest rate is 10 percent.

a) What is the most you would be willing to pay for a share of stock in eLake?

b) If the interest rate is 6 percent, what is the most you would be willing to pay?

c) Comparing your answers to a and b, when interest rates decline, would you expect stock prices in general to rise or fall?

A bond: Maturity: 15 years from now, face value: $1000, coupon: $0, bond price: $500. A personal income tax is defined as a tax on an income flow. In contrast, a capital gains tax is a tax on the sale or realization of an asset that was purchased as cost lower than the purchased price. For this question, assume that the income tax is 25% and the capital gains tax is 10%.

(a) Suppose you need to sell the bond in 5 years from now, what is the annualized after-tax return on this sale?

(b) Suppose the income tax increased to 0.3, what is the new bond price and the new yield to maturity?

(c) Supose interest rate on the cash flows for cash flows 5 years from now increase and the interest rates on cash flows 10 years from now falls, but in a way that the bond price stays constant. What is the new yield to maturity?

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ECON 1110 Chapter Notes - Chapter 28: Capital Outflow, Canadian Dollar, Human Capital

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