O If the market interest rate (i) increases today, the Price of a Bond (P) today willdecline.The following are correct statements about the impact of Market Interest Rate (i*) onvalue and return of a typical Coupon Bond, EXCEPT:The YTM of a Bond and the Market Interest Rate (i*) are the same value, even inthe Short Term.O For a long term bond, if the Market Interest rate (i*) is expected to increase, thecurrent Price of such Bond will Decline.For a two period Bond, if the Market Interest rate (i*) is expected to increase inthe next period, the Expected Total Return (RET) on such bond will decline.Long Term Bonds are considered more risky than Short Term bonds, in part dueto the risk associated to changes in future interest rates.

The coupon bonds are the bonds in which the interest rate that the bonds pays to the holders will be…

Answered: O If the market interest rate (i)…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Figure 10-6 Real interest rate 6% 5 4 3 2 1 0 30 Select one: O O O O 60 90 _____ 120 150 a. supply; rise; decreasing; increasing b. supply; fall; increasing; decreasing c. demand; fall; decreasing; decreasing d. demand; rise; increasing; decreasing 180 will Refer to Figure 10-6. The loanable funds market is in equilibrium, as shown in the figure above. As a result of an increase in the government budget deficit, the thereby the equilibrium real interest rate and the equilibrium quantity of loanable funds. S Quantity of loanable funds (millions of dollars) for loanable funds
Which of the following would ↑ the Qd of LF? Select one: O A. expected profit decreases. B. the real interest rate rises. O C. the real interest rate falls. D. the supply of loanable funds decreases. E. wealth increases. Clear my choice
What is the difference between (Fair Market Price) and (Current Market Price)? I struggle to understand how both relate to the (Required Rate of Return) and (Expected Rate of Return). Please correct me if I am wrong, my understanding is that if Fair Market Price is greater than the Current Market Price on security/stock, then I should buy more. In contrast, I have to sell when it's vice versa. I would appreciate it if you could illustrate with examples, i.e., numbers.
Indicate which one of following statements is true for a coupon bond: A) When the price of a bond is above its par value, the yield to maturity is greater than the coupon rate. B) The yield to maturity and the price of a coupon bond are positively related. C) When the price of a coupon bond equals its face value, the yield to maturity equals the coupon rate. D) When the price of a bond is below its par value, the yield to maturity is less than the coupon rate Support your answer with the use of a formula and explain in detail all the assumptions you make and all the components you use. (You may also want to use a yield calculator to verify you answer).
Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding expected returns of between 20 and 25 percent; another $10 billion yielding between 15 and 20 percent; another $10 billion yielding between 10 and 15 percent; and so forth. a. Cumulate these data and present them graphically using the graph below, putting the expected rate of return (and the real interest rate) on the vertical axis and the amount of investment on the horizontal axis. Instructions: Use the tool provided 'ID' to plot the investment demand curve (plot 6 points total). 30 Tools ID 20 15 10 10 20 30 40 50 60 Investment (billions of dollars) Instructions: Enter your answers as a whole number. b. What will be the equilibrium level of aggregate investment if the real interest rate is: 15 percent: $ billion 10 percent: $ billion 5 percent: $ billion Expected rate of return, percent 25
Suppose that the interest rate is 5 percent. Enter your answers rounded to 2 decimal places. A. What is the future value of $100 four years from now? $ How much of the future value is total interest? $ b. By how much would total interest be greater at an interest rate of 7 percent than at an interest rate of 5 percent? $
Consider a $1200 bond that makes $30 annual coupon payments. If the interest rate is 2 percent and the bond matures in two years, what is the bond's present value? Carefully follow all mathematical instructions. Round intermediate steps to four decimal places and your final answer to two decimal places.
If the price of a government bond (gilt) traded on the stock market rises above its nominal value, which of the following statement must be true? 1 -The bond's coupon falls below the yield 2 - The bond's coupon rises above the yield 3-the bond's yield rises above the coupon 4 - the bond's yield falls below the coupon
The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £)as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantity demanded/supplied at this interest rate? What happens to the demand/supply of the bond as the interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain. e) There is a business cycle contraction, so both supply and demand shifts. After the shift, the new demand curve is given by: D = 4000 + X − 2P , whereas the new supply curve is S = 2P + 200. For which values of X will the interest increase/decrease? Which values of X are in line with empirical data?
2. An individual has an intertemporal utility function that is rational, monotonic, and strictly convex. She can borrow/lend at the interest rate, r, but does not have access to human capital. She is currently consuming a bundle such that MRSx₁x2 >1+r. How many of the following statements COULD BE true? [HINT: try drawing a picture] 0 X1x2 The bundle is optimal (i.e. maximizes her utility). If the individual is consuming both goods, she could do better by consuming less today and consuming more tomorrow. She is at a corner solution in which she only consumes tomorrow. a. 1 b. 2 c. 3 V. d. None of the above statements could be true.
The consumer views present and future consumption as perfect complements and would like to consume equal amounts in both periods, i.e., . Suppose, however, that there is a credit market imperfection that prevents this consumer from borrowing at all, i.e., . a. Show the consumer's lifetime budget constraint and indifference curves on a diagram. Note that because the consumer prefers to purchase present and future consumption in equal amounts, the indifference curves will be kinked at. Note also that because the consumer cannot borrow, the budget constraint will be kinked at the consumer's initial endowment. Recall that the budget constraint is given by: Recall also that the consumer's endowment for each period can be expressed as: b. Calculate the consumer's optimal current-period and future-period consumption and optimal saving and show this in your diagram. Does the existence of the credit market imperfection affect the consumer's choices? Recall that savings is given by: c. Suppose…

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