EC223 Chapter 4: Chapter 4 Notes

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8 Mar 2015

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loan: coupon bond pay the owner of the bond a fixed interest payment every year until the maturity day when a specified final amount is repaid, coupon rate: the interest payment per year you receive, discount bond is bought at a price below its face vale and the face value is repaid at the maturity date (no interest payment just bought at discount) ex. buy at and in a year sell for . Yield to maturity: the interest rate that equates the present value of cash flow payments received from a debt instrument with its value today, simple loan, i= fv/pv 1, the simple interest rate = the yield to maturity, fixed payment loan, i= (pmt/fv)1/n 1, coupon bond, i= pmt/ price of perpetuity, for continuous payment with no ending, discount bond, i = (face value current price)/ current price.

Related Questions

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

1.) Suppose that Joe enjoys and repeatedly does stupid things like getting heavily into debt and insulting police officers. Do these actions constitute systematic errors? If he gets what he wants each time, are his stupid actions even considered to be errors by economists? Explain.

2.) Why do behavioral economists consider it helpful to base a theory of economic behavior on the actual mental processes that people use to make decisions? Why do neoclassical economists not care about whether a theory incorporates those actual mental processes?

10.) What does behavioral economics have to say about each of the following statements?

a.) "Nobody is truly charitable--they just give money to show off."

b.) "America has a ruthless capitalist system. Considerations of fairness are totally ignored."

c.) "Selfish people always get ahead. It's like nobody even notices!"

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1.) One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4 on a grocery item that costs $10 at a local market. But he is unwilling to drive 20 minutes out of his way to save $10 on a laptop that costs $400 at a local store. In percentage terms, how big is the saving on the grocery item? On the laptop? In absolute terms, how big is the savings on the grocery item? On the laptop? If Samir is willing to sacrifice 20 minutes of his time to save $4 in one case, shouldn't he also be willing to sacrifice 20 minutes of his time to save $10?

4.) Angela owes $500 on a credit card and $2,000 on a student loan. The credit card has a 15 percent annual interest rate and the student loan has a 7 percent annual interest rate. Her sense of loss aversion makes her more anxious about the larger loan. As a result, she plans to pay it off first--depsite the fact that professional financial advisors always tell people to pay off their highest-interest-rate loans first. Suppose Angela has only $500 at the present time to help pay down her loans and that this $500 will be the only money she will have for making debt payments for at least the next year. If she uses the $500 to pay off the credit card, how much interest will accrue on the other loan over the coming year? On the other hand, if she uses the $500 to pay off part of the student loan, how much in combined interest will she owe over the next year on the remaining balances on the two loans? By how many dollars will she be better off if she uses the $500 to completely pay off the credit card rather than partly paying down the student loan? (HInt: If you owe X dollars at an annual interest rate of Y percent, your annual interest payment will be X * Y, where the interest rate Y is expressed as a decimal.)

$30,000 QUESTION 3 Imagine you live in a society with progressive taxation. Your friend makes half of your salary and pays 20 percent in income taxes. Which rate most likely would be your income tax rate? (5 points) 2 percent 10 percent 20 percent 40 percent QUESTION 4 02_08_g4_q1.png Look at the bar graph. What kind of tax is depicted here? (5 points) Flat Proportional Progressive Regressive QUESTION 5 Which of these is an example of indirect tax? (5 points) Corporate income tax Gasoline tax Paycheck withholdings Property tax QUESTION 6 02_08_g6_q1.jpg Look at the graph. How does the tax shown differ from a proportional tax? (5 points) A progressive tax increases with income level; a proportional tax decreases with income level. A regressive tax decreases with income level; a proportional tax is the same percentage for everyone. A progressive tax increases with income level; a proportional tax is the same percentage for everyone. A regressive tax is the same percentage for everyone; a proportional tax increases with income level. QUESTION 7 Which of these investments may pay dividends? (5 points) Bonds Savings accounts Certificates of deposit Stocks QUESTION 8 02_08_g8_q1.jpg Assume that the blue section (D) of the chart stands for stocks and the red (A) for mutual funds. This would most likely represent the portfolio of a (5 points) young investor middle-aged investor nearly-retired investor elderly investor QUESTION 9 Assume that the blue section (D) of the chart stands for stocks and the red (A) for mutual funds. This would most likely represent the portfolio of a (5 points) young investor middle-aged investor nearly-retired investor elderly investor QUESTION 9 Which of the following investment plans best reflects diversification? (5 points) Ben has an investment portfolio with numerous stocks and futures. Kenya invests in stocks, bonds, and mutual funds. Jeremiah takes out a CD and keeps the rest of his money in a savings account. Molly splits her investment between mutual funds and a money market account. QUESTION 10 Rudy is a 52-year-old freelance writer who wants a short-term, low-risk investment with low liquidity. Which of these investment vehicles should he consider? (5 points) CD IRA Mutual fund Stocks QUESTION 11 Hometown Bank Products Minimum Opening Deposit Interest Paid per Year Monthly Fee Checking $100.00 0.00% $0.00 Savings $250.00 0.50% $0.00 Platinum Savings $1,000.00 0.75% $10.00 CD (1year) $1,000.00 1.05% $0.00 CD (5 year) $1,000.00 1.80% $0.00 Money Market $1,000.00 0.75% $10.00 Vesna has $1,000 to invest, and she will need to have her money available in the next six months. Which product will yield her the highest interest in her time frame with no monthly fee? (5 points) One-year CD Checking Platinum savings Savings QUESTION 12 Which type of credit involves a set limit based on what a consumer pays up front? (5 points) Loans Installment credit Secured credit cards Unsecured credit cards QUESTION 13 Milo has received several credit card offers. Which of the following features is the riskiest? (5 points) High credit limit Fixed interest Low credit limit Variable interest QUESTION 14 02_08_g14.jpg Amun has four credit cards, each with a different interest rate. He charges $1,000 to each card in January and does not pay down any of the cards for four months. Based on the data in the chart, which two cards accrue the most amount of interest over time? (5 points) Credit 1 and Credit 3 Credit 1 and Credit 4 Credit 2 and Credit 3 Credit 2 and Credit 4 QUESTION 15 Samuel needs to decrease his expenses. To which category should he make cuts first? (5 points) Entertainment Housing Transportation Utilities QUESTION 16 Your friend's job pays $5.00 per hour and he works 20 hours per week. His tax rate is 20 percent. Assuming he works 50 weeks of the year, his yearly gross income is (5 points) $1,000 $4,000 $5,000 $10,000 QUESTION 17 02_08_g17_q3.jpg Gillian graphed her expenses in this pie chart to evaluate how she was spending her income. She would like to purchase health insurance, and calculates that it will cost 10 percent of her income for a year to save for the premium. How could she best shift her expenses to save 10 percent? (5 points) Buy a fuel-efficient car Cut household electricity usage Eat out less often Reduce payments on her debt QUESTION 18 Jonah has a high-paying job and would like to start saving for retirement. He has evaluated his budget in order to add savings to his expenses. He has a moderate amount of debt, and he spends a great deal on housing. His utilities, transportation, and health, expenses are fixed, and he spends little on recreation or eating out. Which action is he most likely to take? (5 points) Consider less costly housing options Pay off his debt Reduce his recreation expenses Search for a job with a higher salary QUESTION 19 Location Starting Salary Cost of Living (per person) Moving Costs Baltimore, MD $51,000 $22,000 $1,200 Cincinnati, OH $42,000 $19,000 none Miami, FL $42,000 $22,000 $1,500 New York, NY $49,000 $26,000 $1,300 Constance will graduate within a year with her teaching certification. She has evaluated teaching jobs in four states. A teaching job in which city would result in the most disposable income in the first year? (5 points) Baltimore, MD Cincinnati, OH Miami, FL New York, NY

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EC223 Chapter 4: Chapter 4 Notes

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