Economics Homework - Money and Banking
Problem 1 - For $9,800 you purchase a T-bill that will pay $10,000 in 76 days. What is your yield to maturity? If the rate of inflation during this period is 5%, what is your real rate of return? Be sure both to show how you calculated your answers and to define all the variables in any mathematical equation you use. If prevailing nominal rates of interest hover around 8%, would this be a lucrative purchase? If you make this purchase, have you invested in the money market or the capital market?
Problem 2 - You have a choice between a financial instrument that pays $11,500 one year from now and another that pays $14,000 five years from today. If the market rate of interest is 7 percent, which instrument has the higher present value? Which should you be willing to pay more for? Be sure both to show how you calculated your answer and to define all the variables in any mathematical equation you use.
Problem 3 - What is the value of a consol (perpetuity) that promises to pay $120 per year if the market rate of interest is (a) 3 percent, (b) 6 percent, and (c) 12 percent? Be sure both to show how you calculate your answers and to define all variables in any mathematical equation you use. If you do purchase the consol, have you invested in the money market or the capital market?