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show all of your work neatness counts 1 suppose you...

Question: show all of your work neatness counts 1 suppose you...

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Show all of your work. Neatness counts!!! 1. Suppose you invest $10,000 in a savings account. what will it be worth in 3 years ifyou earn 3% interest compounded annually? b, what will it be worth in 3 years ifyou earn 4% interest compounded annually? What will it be worth in 7 years if you earn 3% interest compounded annually? C. d. What will it be worth in 3 years if you earn 3% interest compounded monthly? Suppose your discount rate is 2% 2. How much would you pay today for a discount bon that will pay $1,000 in one year? How much would you pay today for a discount bon that will pay $1,000 in five years? How much would you pay today for a 2% coupon bond with annual coupon payments and a face value of $5,000 that matures in three years? How much would you paytoday for a 3% coupon bond with annual coupon payments and a face value of $5,000 that matures in three years? How much would you pay today for a 1% coupon bond with annual coupon payments and a face value of $5,000 that matures in three years? How much would you pay today for a 2% coupon bond with annual coupon payments and a face value of $5,000 that matures in twenty-five years? a. b. c. d. e. f. 3. Suppose environmental economists estimate that 100 years from now climate change will impose a one-time cost on society of five trillion dollars. Congress proposes spending one trillion dollars today on actions which it is known with certainty will completely eliminate the five trillion dollar cost a. Suppose the relevant discount rate is 3%. Should Congress authorize spending the one trillion dollars? Justify your answer b. Suppose that instead of a one-time cost of five trillion dollars, the cost will be five trillion dollars a year, starting in year 100 and then continuing at that level forever. Now, should Congress authorize the one trillion dollar expenditure? (The relevant discount rate remains at 396) Again justify your answer

Suppose the expected inflation rate is 2% and that the nominal interest rate is 3%. a. What is the expected real interest rate? b. Suppose that actual inflation turns out to be 4%, what is the actual real interest rate? c. If you are a lender, would you prefer actual inflation to be greater or less than expected? Explain. 4. suppose you own two 5% coupon bonds, one of which matures in 10 years and the other which matures in 30 years and that you purchased both bonds at face value. Suppose the interest rate now increases to 7%. What price would each ofthe bonds now sell at? 5,

6. Suppose there are three possible states of the market,j- 1 (good),j -2 (average) and j 3 (bad). Each state occurs with probability p, and for each, the returns for three assets (A, B and C) denoted RA, RB and R are given in the following table: State 0.34 0.10 0.10 1/3 113 1/3 0.20 0.10 0.000.10 0.10 0.10 3 Calculate the expected return of each asset.

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