03 Jun Question 1. Suppose that demand and supply for a security is given
Question
1. Suppose that demand and supply for a security is given by the following equations:
Demand: BD = 250 – 0.15b,
Supply: BS = 100 + 0.05b,
where b is the price of the security in dollars.
a. Calculate the equilibrium price and equilibrium quantity of the security.
b. Suppose that the supply curve shifts to BS = 150 + 0.05b. Find the new equilibrium price and equilibrium quantity of the security.
c. Explain in words, if the equilibrium price and equilibrium quantity rise or fall after the shift in supply curve.
2. Suppose you are 22 years and would like to get married at the age of 27. To start a new life,you would like to have $100,000. If the interest rate is 6 percent, about how much do you need to save today?
3. George has almost $30,000 in his account. Some years ago he put $21,320 into his account
that promised to pay 5 percent interest. How many years ago did he open his account?
4. Four years ago Matt deposited some money into an account. He earned 5 percent on this account and now has a balance of about $30,388. How much did he deposit into his account when he opened it?
5. Consider a coupon bond that pays $100 every year and repays its principal amount of $1000 at the end of ten years. If the rate of discount is 8 percent, what is the present value of the bond?
6. Consider a two-year coupon bond that has a present value of $10,000. If the rate of discount is 3 percent, and the payment made at the end of each year is $250, what is the principal amount to be repaid at the end of two years?
7. Suppose that you are considering the purchase of a security that pays $600 every year and repays its principal amount of $10,000 at the end of four year.
a. How much would you be willing to pay for this security if the market interest rate is 6 percent?
b. Suppose that you have just purchased the security, and suddenly the market interest rate falls to 5 percent. What is the security worth?
c. Suppose that one year has elapsed, you have received the first payment of $600, and the market interest rate is still 5 percent. How much would another investor be willing to pay for your security?
d. Suppose that two years have elapsed since you purchased the security, and you have received the first two payments of $600 each. Now suppose that the market interest rate suddenly jumps to 10 percent. How much would another investor be willing to pay for your security?
8. You buy a government bond that pays interest twice a year. The interest payment is $300 each six months. The bond matures in six years. The face value of the bond is $10,000.
The annual market interest rate is 6 percent.
a. What is the present value of the bond? Show your work.
b. After six months go by, you receive the first interest payment of $300. The annual market interest rate has declined to 5 percent and you decide to sell the bond. What is the bond’s present value when you sell it? Show your work.
c. What is your total return from owning the bond for six months (expressed at an annual rate, in percentage points, with two decimals)? Show your work.
9. Suppose you take out a car loan of $18,000 for 5 years at an annual interest rate of 8 percent, with payments to be made monthly. What will your monthly payments be?
10. Suppose you take out a home equity loan of $250,000 for 25 years at an annual interest rate of 6 percent, with payments to be made monthly. What will your monthly payments be
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