EC140 Chapter 27: Chapter 27 Money, Interest Rates and Economic Activity

134 views7 pages

skyarmadillo598

9 Mar 2017

School

Department

Course

Professor

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

meghan78 and 39778 others unlocked

EC140 Full Course Notes

Verified Note

21 documents

Document Summary

Chapter 27: money, interest rates and economic activity. 27. 1 - understanding bonds: present value single amount. 1: the present value of a bond with future payments is negatively related to the market interest rate. If interest rates are high, present value of the bond would be low: present value of bonds would be lower because new bonds that are issued would take the higher interest rate. If market price is > present value of a bond, demand is low: no one will want it, excess supply pushes down market price. If market price is < than the present value of a bond: everyone will want it, excess demand pushes it up, market prices adjust until market value = present value of bond. Bond riskiness: lower bond prices imply a higher yield because if a bond/the company the bond is coming from is risky, no one will want it and the present value/price will decrease.

Related Questions

(a) Assume that a one year bond that has no interest coupon payment with a maturity value (face value) of $1,000 sold for $800. What is the interest rate that this bond will pay when it matures? Please show how you got your answer.

(b) If the prices of similar bonds are selling next month for $70, what is the interest rate that these bonds pay now when they mature. Please show how you got your answer.

(c) Please describe the relationship between bond prices and interest rates. Use the numbers above to support your answer.

lavenderpug75

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?

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?

EC140 Chapter 27: Chapter 27 Money, Interest Rates and Economic Activity

EC140 Full Course Notes

Document Summary

Get access

Related Documents

EC140 Lecture Notes - Lecture 27: Potential Output, Capital Outflow, Canadian Dollar

EC140 Chapter 28: EC140 – CHAPTER 28

EC140 Lecture Notes - Lecture 27: Chapter 27, Monetarism, Substitute Good

Related Questions