chapter_5Interest Rate
布兰查德宏观经济学第七版第7版英文版chapter (5)
Macroeconomics, 7e (Blanchard)Chapter 5: Goods and Financial Markets. The IS-LM Model5.1 The Goods Market and the IS Relation1) The IS curve representsA) the single level of output where the goods market is in equilibrium.B) the single level of output where financial markets are in equilibrium.C) the combinations of output and the interest rate where the money market is in equilibrium.D) the combinations of output and the interest rate where the goods market is in equilibrium.E) none of the aboveAnswer: DDiff: 12) The IS curve will shift to the right when which of the following occurs?A) an increase in the money supplyB) an increase in government spendingC) a reduction in the interest rateD) all of the aboveE) none of the aboveAnswer: BDiff: 23) Which of the following occurs as the economy moves leftward along a given IS curve?A) An increase in the interest rate causes investment spending to decrease.B) An increase in the interest rate causes money demand to increase.C) An increase in the interest rate causes a reduction in the money supply.D) A reduction in government spending causes a reduction in demand for goods.E) An increase in taxes causes a reduction in demand for goods.Answer: ADiff: 24) During 2008 in the United States, consumer confidence fell significantly. Which of the following will occur as a result of this reduction in consumer confidence?A) The LM curve will shift up.B) The LM curve will shift down.C) The IS curve will shift rightward.D) The IS curve will shift leftward.E) The IS curve will shift rightward, and the LM curve will shift up.Answer: DDiff: 25) Suppose policy makers decide to reduce taxes. This fiscal policy action will cause which of the following to occur?A) The LM curve shifts and the economy moves along the IS curve.B) The IS curve shifts and the economy moves along the LM curve.C) Both the IS and LM curves shift.D) Neither the IS nor the LM curve shifts.E) Output will change causing a change in money demand and a shift of the LM curve. Answer: BDiff: 26) Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the IS-LM model, we know with certainty that the following will occur as a result of this fiscal policy action.A) Investment spending will decrease.B) Investment spending will increase.C) There will be no change in investment spending.D) Investment spending may increase, decrease, or not change.E) none of the aboveAnswer: DDiff: 37) For this question, assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a reduction in government spendingA) will cause investment to decrease.B) will cause investment to increase.C) may cause investment to increase or to decrease.D) will have no effect on output.E) will cause a reduction in output and have no effect on the interest rate.Answer: BDiff: 38) Suppose investment spending is not very sensitive to the interest rate. Given this information, we know thatA) the IS curve should be relatively flat.B) the IS curve should be relatively steep.C) the LM curve should be relatively flat.D) the LM curve should be relatively steep.E) neither the IS nor the LM curve will be affected.Answer: BDiff: 29) Explain the determinants of investment. Include in your answer an explanation of how a change in each determinant affects investment.Answer: Investment depends on the level of sales/output and on the interest rate. As output changes, the demand for goods will change and firms will change investment so that their capacity changes with the level of economic activity (and demand). I also depends on the interest rate. As the interest rate rises, the cost of borrowing rises. Firms will cut back on investment as borrowing costs rise.Diff: 210) What is the IS relation? Explain why IS curve is downward sloping.Answer: The IS relation shows the combinations of the interest rate and the level of output that are consistent with equilibrium in the goods market. An increase in the interest rate leads to a decline in output. Consequently, the IS curve is downward sloping.Diff: 211) Graphically derive the IS curve from the goods market equilibrium.Answer: Suppose the initial equilibrium in the goods market is at point A with interest rate i. Suppose now that the interest rate increases from its initial value i to a higher value i'. The increase in the interest rate decreases investment. The decrease in investment leads to a decrease in output. Now the new equilibrium point is at A', with a higher value of i and lower value of Y. After we plot the combinations of i and Y when the goods market is in equilibrium, we can connect these two points (A and A') to get a downward sloping IS curve.Diff: 25.2 Financial Markets and the LM Relation1) For each interest rate, the LM curve illustrates the level of output whereA) the goods market is in equilibrium.B) inventory investment equals zero.C) money supply equals money demand.D) all of the aboveE) none of the aboveAnswer: CDiff: 22) The LM curve shifts down (or, equivalently, to the right) when which of the following occurs?A) an increase in taxesB) an increase in outputC) an open market sale of bonds by the central bankD) an increase in consumer confidenceE) none of the aboveAnswer: EDiff: 23) Which of the following statements is consistent with a given (i.e., fixed) LM curve?A) A reduction in the interest rate causes investment spending to increase.B) A reduction in the interest rate causes money demand to decrease.C) A reduction in the interest rate causes an increase in the money supply.D) An increase in output causes an increase in demand for goods.E) An increase in output causes an increase in money demand.Answer: EDiff: 24) In late 2007 and early 2008, the U.S. Federal Reserve pursued expansionary monetary policy. Which of the following will occur as a result of this monetary policy action?A) The LM curve shifts down.B) The LM curve shifts up.C) The IS curve shifts rightward as the interest rate falls.D) The IS curve shifts leftward as the interest rate increases.E) none of the aboveAnswer: ADiff: 25) Suppose the demand for money is not very sensitive to the interest rate. Given this information, we know thatA) the IS curve should be relatively flat.B) the IS curve should be relatively steep.C) the LM curve should be relatively flat.D) the LM curve should be relatively steep.E) neither the IS nor the LM curve will be affected.Answer: DDiff: 36) Which of the following is the definition for the real supply of money?A) The stock of money measured in terms of goods, not dollars.B) The stock of high powered money only.C) The real value of currency in circulation only.D) The actual quantity of money, rather than the officially reported quantity.E) The ratio of the real GDP to the nominal money supply.Answer: ADiff: 17) First, define the LM curve. Second, explain why it has its particular shape.Answer: The LM curve illustrates the combinations of the interest rate and level of output that maintain financial market equilibrium. The curve is upward sloping because as income increases, money demand will rise. This increase in money demand will cause an excess demand for money and an excess supply of bonds. Bond prices will fall and the interest rate will increase until equilibrium is restored.Diff: 25.3 Putting the IS and the LM Relations Together1) Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the following is true for this economy?A) Production equals demand.B) The quantity supplied of bonds equals the quantity demanded of bonds.C) The money supply equals money demand.D) Financial markets are in equilibrium.E) all of the aboveAnswer: EDiff: 12) Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know thatA) the goods market is in equilibrium and the money market is not in equilibrium.B) the money market and bond markets are in equilibrium and the goods market is not in equilibrium.C) the money market and goods market are in equilibrium and the bond market is not in equilibrium.D) the money, bond and goods markets are all in equilibrium.E) neither the money, bond, nor goods markets are in equilibrium.Answer: BDiff: 23) Suppose the current level of output and the interest rate are such that the economy is operating on neither the IS nor LM curve. Which of the following is true for this economy?A) Production does not equal demand.B) The money supply does not equal money demand.C) The quantity supplied of bonds does not equal the quantity demanded of bonds.D) Financial markets are not in equilibrium.E) all of the aboveAnswer: EDiff: 24) An increase in the money supply will cause an increase in which of the following variables?A) outputB) investmentC) consumptionD) all of the aboveE) none of the aboveAnswer: DDiff: 25) Suppose there is an increase in consumer confidence. Which of the following represents the complete list of variables that must increase in response to this increase in consumer confidence?A) consumptionB) consumption and investmentC) consumption, investment and outputD) consumption and outputE) consumption, output and the interest rateAnswer: EDiff: 26) Suppose there is a fiscal contraction. Which of the following is a complete list of the variables that must decrease?A) consumptionB) consumption and investmentC) consumption and outputD) consumption, output and the interest rateE) consumption, output and investmentAnswer: CDiff: 27) We know with certainty that a tax increase must cause which of the following?A) an increase in investmentB) a reduction in investmentC) no change in investmentD) none of the aboveAnswer: DDiff: 28) A fiscal contraction will tend to cause which of the following to occur?A) a reduction in the interest rate and a reduction in investmentB) a reduction in the interest rate and an upward shift in the LM curveC) a reduction in the interest rate and an ambiguous effect on investmentD) no change in output if the Fed simultaneously pursues contractionary monetary policy Answer: CDiff: 29) An increase in the money supply must cause which of the following?A) a leftward shift in the IS curveB) a reduction in the interest rate and ambiguous effects on investmentC) an increase in investment and a rightward shift in the IS curveD) no change in the interest rate if investment is independent of the interest rateE) no change in output if investment is independent of the interest rateAnswer: EDiff: 110) An increase in consumer confidence will tend to cause which of the following to occur?A) a rightward shift in the IS curveB) a leftward shift in the IS curveC) an upward shift in the LM curveD) a downward shift in the LM curveAnswer: ADiff: 111) Assume that investment does not depend on the interest rate. A reduction in government spending will cause which of the following for this economy?A) no change in the interest rateB) no change in outputC) no change in investmentD) an increase in investmentE) none of the aboveAnswer: EDiff: 312) Assume that investment does not depend on the interest rate. A reduction in the money supply will cause which of the following for this economy?A) no change in the interest rateB) no change in outputC) a reduction in investmentD) an increase in investmentAnswer: BDiff: 313) For this question, assume that investment spending depends only on output and no longer depends on the interest rate. Given this information, an increase in the money supplyA) will cause investment to decrease.B) will cause investment to increase.C) will cause a reduction in the interest rate.D) will have no effect on output or the interest rate.E) will cause an increase in output and have no effect on the interest rate.Answer: CDiff: 314) A reduction in consumer confidence will likely have which of the following effects?A) a rightward shift in the IS curveB) a leftward shift in the IS curveC) an upward shift in the LM curveD) a downward shift in the LM curveAnswer: BDiff: 215) An increase in the reserve deposit ratio, θ, will most likely have which of the following effects?A) a rightward shift in the IS curveB) a leftward shift in the IS curveC) an upward shift in the LM curveD) a downward shift in the LM curveAnswer: CDiff: 216) A Fed purchase of securities will most likely have which of the following effects?A) a rightward shift in the IS curveB) a leftward shift in the IS curveC) an upward shift in the LM curveD) a downward shift in the LM curveAnswer: DDiff: 217) A reduction in the aggregate price level, P, will most likely have which of the following effects?A) a rightward shift in the IS curveB) a leftward shift in the IS curveC) an upward shift in the LM curveD) a downward shift in the LM curveAnswer: DDiff: 218) An increase in the aggregate price level, P, will most likely have which of the following effects?A) a rightward shift in the IS curveB) a leftward shift in the IS curveC) an upward shift in the LM curveD) a downward shift in the LM curveAnswer: CDiff: 219) The IS curve will not shift when which of the following occurs?A) a reduction in government spendingB) a reduction in the interest rateC) a reduction in consumer confidenceD) all of the aboveE) none of the aboveAnswer: BDiff: 120) Which of the following best defines the IS curve?A) the combinations of i and Y that maintain equilibrium in the goods marketB) illustrates the effects of changes in i on investmentC) illustrates the effects of changes in i on desired money holdings by individualsD) the combinations of i and Y that maintain equilibrium in financial marketsAnswer: ADiff: 121) Which of the following best defines the LM curve?A) the combinations of i and Y that maintain equilibrium in the goods marketB) illustrates the effects of changes in i on investmentC) illustrates the effects of changes in i on desired money holdings by individualsD) the combinations of i and Y that maintain equilibrium in financial marketsAnswer: DDiff: 122) Based on our understanding of the IS-LM model that takes into account dynamics, we know that a reduction in the money supply will causeA) an immediate drop in Y and immediate increase in i.B) an immediate increase in i and no initial change in Y.C) a gradual increase in i and gradual reduction in Y.D) none of the aboveAnswer: BDiff: 223) Based on our understanding of the IS-LM model that takes into account dynamics, we know that a reduction in government spending will causeA) an immediate drop in Y and immediate increase in i.B) an immediate reduction in i and no initial change in Y.C) a gradual reduction in i and gradual reduction in Y.D) a gradual reduction in i and an immediate reduction in Y.Answer: CDiff: 224) Based on our understanding of the IS-LM model that takes into account dynamics, we know that an increase in the money supply will causeA) an immediate increase in i and no initial change in Y.B) an immediate decrease in i and no initial change in Y.C) a gradual decrease in i and gradual increase in Y.D) none of the aboveAnswer: BDiff: 225) Based on our understanding of the IS-LM model that takes into account dynamics, we know that an increase in government spending will causeA) a gradual increase in i and gradual increase in Y.B) an immediate increase in Y and immediate drop in i.C) an immediate increase in i and no initial change in Y.D) a gradual increase in i and an immediate increase in Y.Answer: ADiff: 226) An increase in government spending will likely have which of the following effects?A) a rightward shift in the IS curveB) a leftward shift in the IS curveC) an upward shift in the LM curveD) a downward shift in the LM curveAnswer: ADiff: 227) A reduction in the reserve depos it ratio, θ, will most likely have which of the following effects?A) a rightward shift in the IS curveB) a leftward shift in the IS curveC) an upward shift in the LM curveD) a downward shift in the LM curveAnswer: DDiff: 228) If government spending and taxes increase by the same amount,A) the IS curve does not shiftB) the IS curve shift leftwardC) the IS curve shifts rightwardD) the LM curve shifts downwardAnswer: CDiff: 229) If government spending and taxes decrease by the same amount,A) the IS curve does not shift.B) the IS curve shift leftward.C) the IS curve shifts rightward.D) the LM curve shifts downward.Answer: BDiff: 230) Which of the following triggered the U.S. recession of 2001?A) decline in investment demandB) decline in consumption demandC) increase in budget deficitD) increase in trade deficitAnswer: ADiff: 231) The IS curve will shift to the left when which of the following occurs?A) a reduction in the money supplyB) a reduction in government spendingC) an increase in the interest rateD) all of the aboveE) none of the aboveAnswer: BDiff: 232) Which of the following occurs as the economy moves rightward along a given IS curve?A) A reduction in the interest rate causes investment spending to decrease.B) A reduction in the interest rate causes money demand to increase.C) A reduction in the interest rate causes a reduction in the money supply.D) An increase in government spending causes a reduction in demand for goods.E) A reduction in taxes causes a reduction in demand for goods.Answer: ADiff: 233) When the central bank pursues contractionary monetary policy, we that this policy will result in an increase in the interest rate, a reduction in investment, a reduction in demand, and a lower level of equilibrium output. Explain what happens to the position of the IS curve as the central bank pursues contractionary monetary policy.Answer: Changes in the interest rate do cause changes in investment, demand, and output. However, they do not cause shifts of the IS curve. Changes in the interest rate cause movements along the IS curve.Diff: 234) A fiscal expansion (e.g. a tax cut) will result in an increase in income, an increase in money demand, and an increase in the equilibrium interest rate in financial markets. Explain what happens to the position of the LM curve as policy makers pursue expansionary fiscal policy. Answer: The fiscal expansion will cause an increase in output. However, changes in Y only cause movements along the LM curve. The effects of changes in Y on the interest rate are embedded in the shape of the LM curve.Diff: 2IS curve.Answer: A Fed sale of bonds will cause a reduction in H and a reduction in the money supply. This will cause an excess demand for money and the interest rate must increase to restore money market equilibrium. The LM curve will shift up as a result of this to reflect the now higher interest rate. The IS curve does not shift as a result of this. We would simply observe a movement along the IS curve.Diff: 236) Explain in detail what effect a reduction in government spending will have on: (1) the LM curve; and (2) the IS curve.Answer: A reduction in taxes will cause an increase in disposable income and an increase in consumption. The rise in C will cause an increase in demand and the equilibrium level of output in the goods market will be higher. This is reflected in a rightward shift in the IS curve. Goods market events such as this will not cause a shift in the LM curve (only a movement along it). Diff: 237) Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a reduction in consumer confidence will have on output, the interest rate, and investment. Answer: A reduction in consumer confidence will cause a reduction in consumption and, therefore, a reduction in demand and a leftward shift in the IS curve. As Y decreases, money demand will decrease causing the interest rate to fall. The effects on I are ambiguous. The lower Y will cause I to fall while the lower interest rate will cause I to increase.Diff: 238) Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a monetary expansion will have on output, the interest rate, and investment.Answer: An increase in M will cause the LM curve to shift down and the interest rate to fall. As the interest rate falls, firms will increase investment causing an increase in demand and subsequent increase in output. So, the interest rate will fall and Y will rise. I will be higher due to the rise in Y and drop in the interest rate.Diff: 239) Increases in the budget deficit are believed to cause reductions in investment. Based on your understanding of the IS-LM model, will a fiscal policy action that causes a reduction in the budget deficit cause an increase in investment? Explain.Answer: A policy that causes a reduction in the budget deficit will have an ambiguous effect on investment. Output will fall which will tend to depress I. However, the interest rate will also fall which will tend to increase I. I could increase, decrease, or remain unchanged.Diff: 2the IS curve.Answer: A Fed purchase of bonds will cause an increase in H and an increase in the money supply. This will cause an excess supply of money and the interest rate must decline to restore money market equilibrium. The LM curve will shift down as a result of this to reflect the now lower interest rate. The IS curve does not shift as a result of this. We would simply observe a movement along the IS curve.Diff: 241) Explain in detail what effect an increase in government spending will have on: (1) the LM curve; and (2) the IS curve.Answer: An increase in government spending will cause an increase in demand and the equilibrium level of output in the goods market will be higher. This is reflected in a rightward shift in the IS curve. Goods market events such as this will not cause a shift in the LM curve (only a movement along it).Diff: 25.4 Using a Policy Mix1) Suppose there is a simultaneous fiscal expansion and monetary expansion. We know with certainty thatA) output will increase.B) output will decrease.C) the interest rate will increase.D) the interest rate will decrease.E) both output and the interest rate will increase.Answer: ADiff: 22) Suppose there is a simultaneous fiscal expansion and monetary contraction. We know with certainty thatA) output will increase.B) output will decrease.C) the interest rate will increase.D) the interest rate will decrease.E) both output and the interest rate will increase.Answer: CDiff: 23) For this question, assume that investment spending depends only on output and no longer depends on the interest rate. Given this information, an increase in government spendingA) will cause investment to decrease.B) will cause investment to increase.C) may cause investment to increase or to decrease.D) will have no effect on output.E) will cause an increase in output and have no effect on the interest rate.Answer: BDiff: 34) A reasonable dynamic assumption for the IS-LM model is thatA) the economy is always on both the IS and LM curves.B) the economy is always on the IS curve, but moves only slowly to the LM curve.C) the economy is always on the LM curve, but moves only slowly to the IS curve.D) the money market is quick to adjust, but the bond market adjusts more slowly.E) adjustment to the new IS-LM equilibrium is instantaneous after an LM shift, but not after an IS shift.Answer: CDiff: 25) Under the reasonable dynamic assumptions discussed in the text, a monetary contraction should result inA) an immediate rise in the interest rate, and no further interest rate changes.B) an immediate rise in the interest rate, and then a fall in the interest rate over time.C) an immediate rise in the interest rate, and then a further rise over time.D) a very gradual but steady rise in the interest rate to its new equilibrium level.E) no change in the interest rate initially, and then a sudden rise to its new equilibrium value. Answer: BDiff: 26) For this question, assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a reduction in the money supplyA) will cause investment to decrease.B) will cause investment to increase.C) may cause investment to increase or to decrease.D) will have no effect on output.E) will cause a reduction in output and have no effect on the interest rate.Answer: ADiff: 37) Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that this combination of policies must causeA) an increase in the interest rate (i).B) a reduction in i.C) an increase in output (Y).D) a reduction in Y.Answer: CDiff: 28) Suppose there is a simultaneous Fed sale of bonds and increase in consumer confidence. We know with certainty that these two simultaneous events will causeA) an increase in the interest rate (i).B) a reduction in i.C) an increase in output (Y).D) a reduction in Y.Answer: ADiff: 29) Suppose there is a simultaneous central bank purchase of bonds and increase in taxes. We know with certainty that this combination of policies must causeA) an increase in the interest rate (i).B) a reduction in i.C) an increase in output (Y).D) a reduction in Y.Answer: BDiff: 210) Suppose there is a simultaneous central bank sale of bonds and tax increase. We know with certainty that this combination of policies must causeA) an increase in the interest rate (i).B) a reduction in i.C) an increase in output (Y).D) a reduction in Y.Answer: DDiff: 211) First, briefly explain what is meant by the policy mix. Second, explain what effect different policy mixes might have on the level of output, investment, and the interest rate.Answer: The policy mix refers to the possible combinations of monetary (exp. or contr.) and fiscal (exp. or contr.) that can be simultaneously implemented. There are a number of different answers that could be given to the latter part of the question. The effects on output, the interest rate, and investment will depend on the type of mix.Diff: 212) Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.Answer: In this case, the LM curve shifts up and the IS curve shifts to the right. The interest rate will clearly be higher. The effects on output depend on the relative magnitude of the two policies. The effects on I are also ambiguous. If output falls, I will be lower. However, it is possible that output will rise here which creates the ambiguity.Diff: 213) Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in taxes and reduction in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.Answer: In this case, the LM curve shifts up and the IS curve shifts to the left. In this case, output will clearly fall. What happens to the interest rate depends on the relative magnitude of the two policies. The effects on I are again ambiguous.Diff: 214) Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and increase in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain.Answer: In this case, the LM curve shifts down and the IS curve shifts to the right. The output will clearly be higher. The effects on interest rate depend on the relative magnitude of the two policies. The effects on I are also ambiguous. If interest rate falls, I will be higher. However, it is possible that interest rate will rise here which creates the ambiguity.Diff: 25.5 How does the IS-LM Model Fit the Facts?1) Empirically it takes nearly ________ years for monetary policy to have its full effect on output.A) 2B) 1C) 3D) 4Answer: ADiff: 1。
英文版国际金融练习题Chapter_5
INTERNATIONAL FINANCEAssignment Problems (5) Name: Student#: I. Choose the correct answer for the following questions (only ONE correct answer) (3 credits for each question, total credits 3 x 20 = 60)1. When the supply of and demand for a foreign exchange in the foreign exchange market are exactly the same, the exchange rate is the __________.A. real exchange rateB. effective exchange rateC. equilibrium exchange rateD. cross exchange rate2. An increase in the demand for French goods and services will __________.A. induce a rightward shift in the demand for euroB. induce a leftward shift in the demand for euroC. result in a rightward movement along the demand curve for euroD. result in a leftward movement along the demand curve for euro3. If U.S. demand for Japanese goods increases and Japan’s demand for U.S. products also rises at the same time, which of the following can you conclude in this situation?A. The U.S. dollar will appreciate against the yen.B. The U.S. dollar will depreciate against the yen.C. The U.S. dollar will not change relative to the yen.D. The U.S. dollar may appreciate, depreciate, or remain unchanged against theyen.4. If the price of a pair of Nike sneakers costs $85 in U.S, and the price of the same sneakers is €80 in Paris, the spot rate is $1.35 per euro, the euro __________.A. is correctly valued according to PPPB. is correctly valued according to relative PPPC. is undervalued according to PPPD. is overvalued according to PPP5. If the expected exchange rate E (S B/A) according to the relative purchasing power parity is lower than the spot exchange rate (S B/A), we may conclude that __________.A. country B is expected to run huge BOP surplus with country AB. country A’s interest rate is going to be lower than that of country B’sC. the expected inflation rate in country A is higher than the expected inflation rate in country BD. the expected inflation rate in country A is lower than the expected inflation rate in country B6. Assume that PPP holds in the long run. If the price of a tradable good is $20 in theU.S. and 100 pesos in Mexico; and the exchange rate is 7 pesos/$ right now, which of the following changes might we expect in the future?A. an increase in the price of the good in the U.SB. a decrease in the price of the good in MexicoC. an appreciation of the peso in nominal termsD. a depreciation of the peso in nominal terms7. Which basket of goods would be most likely to exhibit absolute purchasing powerparity?A. Highly tradable commodities, such as wheatB. The goods in the Consumer Price indexC. Specialized luxury goods, which are subject to different tax rates across countriesD. Locally produced goods, such as transportation services, which are not easily traded8. The absolute purchasing power parity says that the exchange rate between the two currencies should be determined by the __________ .A. relative inflation rate of the two currenciesB. relative price level of the two countriesC. relative interest rate of the two currenciesD. relative money supply of the two countries9. According to the relative PPP, if country A’s inflation rate is higher than country B’s inflation rate by 3%, __________.A. country A’s currency should depreciate against country B’s currency by 3%B. country A’s currency should appreciate against country B’s currency by 3%C. it is hard to say whether country A’s currency should appreciate or depreciate against country B’s currency. The exchange rate is influenced by many factorsD. none of the above is true10. If the law of one price holds for a particular good, we may conclude that __________.A. there is no trade barriers for the good among the different nationsB. the price of the good is the same ignoring the other expensesC. arbitrage for the good does not existD. all of the above are true11. An investor borrows money in one market, sells the borrowed money on the spot market, invests the proceeds of the sale in another place and simultaneously buys back the borrowed currency on the forward market. This is called __________.A. uncovered interest arbitrageB. covered interest arbitrageC. triangular arbitrageD. spatial arbitrage12. Real return equalization across countries on similar financial instruments is called __________.A. interest rate parityB. uncovered interest parityC. forward parityD. real interest parity13. In which of the following situations would a speculator wish to sell foreign currency on the forward market?A. If E[S1d/f] < F1d/fB. If E[S1d/f] > F1d/fC. If E[S1d/f] = F1d/fD. If E[S1d/f] = 1/F1d/f14. According to IRP, if the interest rate in country A is higher than that in country B, the forward exchange rate, defined as F1A/B is expected to be __________.A. lower than the spot rate S0A/BB. the same as the spot rate S0A/BC. higher than the spot rate S0A/BD. necessary the same as the future spot rate S1A/B15. For arbitrage opportunities to be practicable, __________.A. arbitragers must have instant access to quotesB. arbitragers must have instant access to executionsC. arbitragers must be able to execute the transactions without an initial sum of money relying on their bank’s credit standingD. All of the above must be true.16. The __________ states that the forward exchange rate quoted at time 0 for delivery at time t is equal to what the spot rate is expected to be at time t.A. interest rate parityB. uncovered interest parityC. forward parityD. real interest parity17. Assume expected value of the U.S. dollar in the future is lower than that now compared to the value of the Japanese yen. The U.S. inflation rate must be higher than Japan’s inflation rate according to __________.A. relative PPPB. Fisher equationC. International Fisher relationD. IRP18. According to covered interest arbitrage if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the __________ to __________ at a rate at least of 1% per year over the next 5 years.A. British pound; appreciateB. British pound; revalueC. U.S. dollar; appreciateD. U.S. dollar; depreciate19. Covered interest arbitrage moves the market __________ equilibrium because __________.A. toward; investors are now more willing to invest in risky securitiesB. toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the twoC. away from; purchasing a currency on the spot market and selling in the forward market increases the differential between the twoD. away from; demand for the stronger currency forces up the interest rates on the weaker security20. If the forward exchange rate is an unbiased predictor of the expected future spot rate, which of the following is NOT true?A. The future spot rate will actually be equal to what the forward rate predictsB. The forward premium or discount reflects the expected change in the spot exchange rate.C. Speculative activity ensures that the forward rate does not diverge too far from the market’s consensus expectation.D. All of the above are true.II. Problems (40 credits)1.The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In January 2002 the Argentine peso was floated. On January 29, 2003, it was trading at Ps3.20/$. During that one year period Argentina’s inflation rate was 20% on an annualized basis. Inflation in the United States during that same period was2.2% annualized. (10 credits)a. What should have been the exchange rate in January 2003 if purchasing power parity held?b. By what percentage was the Argentine peso undervalued on an annualized basis?2. Assume that the interest rate paid by an American borrower on a ten-year foreign bond is 10% if the bond is sold in Denmark and 7% if the bond is sold in the Netherland. Will the expected inflation rate in the Netherlands likely be higher than the expected inflation rate in Denmark? Will the Danish kroner be expected to increase in value against the Dutch guilder? Explain your answer. (5 credits)3. Suppose S = $1.25/₤ and the 1-year forward rate is F = $1.20/₤. The real interest rate on a riskless government security is 2 percent in both England and the United States. The U.S. inflation rate is 5 percent. (5 credits)a. What is England’s nominal required rate of return on riskless government securities?b. What is England’s inflation rate if the equilibrium relationships hold?4. Akira Numata, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes: (12 credits)Spot rate: ¥118.60/$ 180-day forward rate: ¥117.80/$ 180-day dollar 4.8% per yearinterest rate180-day yen 3.4% per yearinterest rateThe bank does not calculate transaction costs on any individual transaction because these costs are part of the overall operating budget of the arbitrage department. Plot the given information on the covered interest parity grid. Explain and illustrate the specific steps Akira must take to make a covered interest arbitrage profit.5. On a particular day, the spot rate between Czech koruna (CKR) and the U.S. dollar is CKR30.35/$, while the interest rate on a one-year financial instrument in Czech is7.5% and 3.5% in U.S. (8 credits)a. What is your expected spot exchange rate a year later?b. You’re concerned your investment in the Czech Republic because of the economic uncertainty in that country. When you expect the future value of the koruna, you require a risk premium of 2%. What is the expected future spot rate supposed to be?Answers to Assignment Problems (5)Part II1. a. inflation differential (20% -2.2%) = 17.8%U.S. should have appreciated by 17.8%Implied exchange rate 1(1 + 17.8%) = Ps1.178/$b. (1.178 – 3.2 ) / 3.2 = -63.19%2. a. According to international Fisher equation: (1 + i d) / (1 + i f) = (1 + E[πd]) / (1 + E[πf])i d: interest rate in Denmarki f: interest rate in Netherlandπd: Danish inflation rateπf Dutch inflation rateSince (1 + i d) / (1 + i f) = (1 +10%)/(1 + 7%) > 0So, (1 + E[πd]) / (1 + E[πf]) >0, which means the expected inflation rate in Denmark would be greater than that in Netherland.b. If Danish inflation is higher than Dutch inflation, Danish kroner will be expected to decrease in value against the Dutch guilder. (relative PPP theory)3. a. U.S. nominal interest rate 2% + 5% = 7% (Fisher equation)7% - U.K.i = (1.2 – 1.25)/1.25 (IRP)U.K.i = 7% + 4% = 11%b. 11% - 2% = 9% (Fisher equation)4. a. According to IRP:i￥– i$ = 4.8%/2 – 3.4%/2 = 0.7% = 0.007(F￥/$– S￥、$) / S￥/$ = (117.8 – 118.6) / 118.6 = - 0.006745i￥– i$￥/$– S￥、$) / S￥/$greater than forward-spot exchange rate differential.Step 1: Since Akira decides to invest $5,000,000, so he borrow yen equivalent $5,000,000 x ¥118.6/$ = ¥593,000,000Akira’s obligation: ¥593,000,000 x (1 + 1.7%) = ¥603,081,000 Step 2: Sell yen for dollar at the spot market¥593,000,000 / ¥118.6/$ = $5,000,000 (dollar inflow)Step 3: invest in U.S. market$5,000,000 x (1 + 2.4%) = $5,120,000 (payoff)Step 4: sell dollar for yen at the forward market($5,120,000) x (¥117.8/$) = ¥603,136,000 (yen inflow)Akira’s net profit: ¥603,136,000 –¥603,081,000 = ¥55,0005. a. According to UIP, i CKR– i$ = (E(S) – S)/S7.5% - 3.5% = ((E(S) – 30.35)/30.35E[S] = (30.35 x 0.04) + 30.35 = 31.564b. i CKR– i$ = (E(S) – S)/S + risk premium7.5% - 3.5% = ((E(S) – 30.35)/30.35 + 2%E[S] = (30.35 x 0.02) + 30.35 = 30.957。
Chapter 5 补充后
Chapter 5: Evaluating a Single Project
Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
企业资金分配问题的一个简单例子
Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
Copyright ©2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved.
To be attractive, a capital project must provide a return that exceeds a minimum level established by the organization. This minimum level is reflected in a firm’s Minimum Attractive Rate of Return (MARR). 为了具有吸引力，资本项目必须提供一个超出 由组织建立的最低标准的回报。 这个最低标准反应为公司的最低吸引力收益率 （MARR）。
Copyright ©2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved.
The objective of Chapter 5 is to discuss and critique contemporary methods for determining project profitability.
新编金融英语教程 Chapter5 Exchange Rate
5.2 Key Points
5.2.1 Definition of Exchange Rate
Exchange Rate
The exchange rate is the ratio of the currency of one country to the currency of another country or the price of one currency in another currency.
Given that different currencies in the world have different names and values, it is necessary for countries to set a rate, at which they can exchange their currencies. This rate is called the exchange rate.
We begin by identifying the major factors that can alter demand:
Yen/dollar
100 50
Supply of dollars
A
B
Demand
of
dollars
Demand for dollars after rise in U.S. price
Chapter 5
Chapter 5 Questions V1
How to Value Bonds5.1What is the present value of a 10-year, pure discount bond paying $1,000 at maturity if theappropriate interest rate is:a. 5 percent?b.10 percent?c.15 percent?5.2Microhard has issued a bond with the following characteristics:Principal: $1,000Time to maturity: 20 yearsCoupon rate: 8 percent, compounded semiannuallySemiannual paymentsCalculate the price of this bond if the stated annual interest rate, compounded semiannually, is:a.8%b.10%c.6%5.3Consider a bond with a face value of $1,000. The coupon payment is made semiannually and theyield on the bond is 12% (effective annual yield). How much would you pay for the bond ifa.the coupon rate is eight percent and the remaining time to maturity is 20 years?b.the coupon rate is 10 percent and the remaining time to maturity is 15 years?5.4Jay’s Trucking, Inc. has issued an eight percent, 20-year bond paying interest semiannually. Thebond has a face value of $1,000. If the yield on the bond is 10 percent (effective annual yield),what is the price of the bond?5.5 A bond is sold at $923.14 (below its par value of $1,000). The bond matures in 15 years and has a10-percent yield, expressed as a stated annual interest rate, compounded semiannually. What isthe coupon rate on the bond if the coupon is paid semiannually? The next payment occurs sixmonths from today.5.6You have just purchased a newly-issued $1,000 five-year Vanguard Company bond at par. Thisfive-year bond pays $60 in interest semiannually. You are also considering the purchase ofanother Vanguard Company bond that pays $30 in semiannual interest payments and has six years remaining before maturity. This bond has a face value of $1,000.a.What is the yield on the five-year bond (expressed as an effective annual yield)?b.Assume that the five-year bond and the six-year bond have the same yield. What shouldyou be willing to pay for the six-year bond?c.How will your answer in part (b) change if the five-year bond pays $40 in semiannualinterest instead of $60? Assume that the five-year bond paying $40 semiannually ispurchased at par.Bond Concepts5.7Consider two bonds, A and B. The coupon rates are 10 percent and the face values are $1,000 forboth bonds. Both bonds have annual coupons. Bond A has 20 years to maturity while bond B has10 years to maturity.a.What are the prices of the two bonds if the relevant market interest rate for both bonds is10 percent?b.If the market interest rate increases to 12 percent, what will be the prices of the two bonds?c.If the market interest rate decreases to eight percent, what will be the prices of the twobonds?5.8a. If the market interest rate unexpectedly increases, what would be the effect on the pricesof long-term bonds? Why?b. How would a rise in the interest rate affect the general level of stock prices? Why?5.9Consider a bond paying an annual coupon of $80 with a face value of $1,000. Calculate the yieldto maturity if the bond hasa.20 years remaining to maturity and is priced at $1,200.b.10 years remaining to maturity and is priced at $950.5.10HexCorp Inc. has two different bonds currently outstanding. Bond A has a face value of $40,000and matures in 20 years. The bond makes no payments for the first six years, pays $2,000semiannually for the subsequent eight years, and finally pays $2,500 semiannually for the last sixyears. Bond B also has a face value of $40,000 and matures in 20 years. However, it makes nocoupon payments over the life of the bond. If the stated annual interest rate is 12 percent,compounded semiannually,a.what is the current price of Bond A?b.what is the current price of Bond B?5.11Use the following February 11, 2002 Wall Street Journal quotation for AT&T Corp. Which of thefollowing statement are false?a.The closing price of the bond with the shortest time to maturity is $1,000.b.The annual coupon for the bond maturing in 2018 is $90.00.c.The price on the day before this quotation (February 9) for the AT&T bond maturing in2024 is $1,075 per bond contract.d.The current yield on the AT&T bond maturing in 2004 is 7.125 percent.e.The AT&T bond maturing in 2004 has a yield to maturity of less than 7.125 percent.5.12The following are selected quotations from the Wall Street Journal on Friday, April 23, 2002.Which of the following statements about Wilson’s bond are false?a.The bond maturing in 2003 has a yield to maturity greater than 6 3/8 percent.b.The closing price of the bond with the shortest time to maturity on the day before thequotation is $1,003.25.c.The annual coupon payment for the bond maturing in 2016 is $75.00.d.The current yield on the Wilson’s bond with the longest time to ma turity is 7.29 percent.e.None of the above.The Present Value of Common Stocks5.13 A common stock just paid an annual dividend of $2 yesterday. The dividend is expected to growat eight percent annually for the next three years, after which it will grow at four percent inperpetuity. The appropriate discount rate is 12 percent. What is the price of the stock?5.14Use the following February 12, 2002 Wall Street Journal quotation for Merck & Co. to answer thenext question.Which of the following statements are false?a.The dividend yield is approximately 1.6 percent.b.The closing price per share on February 10, 2002 was $113.75.c.The closing price per share on February 11, 2002 was $115.d.The earnings per share were about $3.83.5.15Examine the following stock quote for Citigroup:T he expected growth rate of Citigroup’s dividends is seven percent per year. According to theconstant-growth dividend model, what is the stock’s required return? Assume that the annualdividend of $1.30 was paid yesterday.5.16You own $100,000 worth of Smart Money stock. One year from now, you will receive a dividendof $2 per share. You will receive a $4 dividend two years from now. You will sell the stock for$50 per share three years from now. Dividends are taxed at the rate of 28 percent. Assume there is no capital gains tax. The required rate of return is 15 percent. How many shares of stock doyou own?5.17Consider the stock of Davidson Company, which will pay an annual dividend of $2 one year fromtoday. The dividend will grow at a constant annual rate of five percent, forever. The marketrequires a 12-percent return on the company’s stock.a.What is the current price of a share of the stock?b.What will the stock price be 10 years from today?5.18Scubaland, Inc., is experiencing a period of rapid growth. Earnings and dividends per share areexpected to grow at a rate of 18 percent during the next two years, 15 percent in the third year, and six percent thereafter. Yesterday, Scubaland paid a dividend of $1.15. If the required rate ofreturn on the stock is 12 percent, what is the price of a share of the stock today?5.19Calamity Mining Company’s iron ore reserves are being depleted, and its costs of recovering adeclining quantity of ore are rising each year. As a result, the company’s earnin gs are declining ata rate of 10 percent per year. If the dividend per share to be paid tomorrow is $5 and the requiredrate of return is 14 percent, what is the value of the firm’s stock? Assume that the dividendpayments are based on a fixed percentage of the firm’s earnings.5.20Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $1 at the end of each ofthe next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 0.5 percent, forever.The appropriate rate of return on the stock is 10 percent, compounded quarterly. What is thecurrent stock price?5.21Suppose Amsterdam Foods, Inc., has just paid a dividend of $1.40 per share. Its dividend isexpected to grow at five percent per year in perpetuity. If the required return is 10 percent, what is the value of a share of Amsterdam Foods?5.22In order to buy back its own shares, Pennzoil Co. has decided to suspend its dividends for the nexttwo years. It will resume its annual cash dividend of $2.00 in year 3 and year 4. Thereafter, itsdividend payments will grow at an annual growth rate of six percent, forever. The required rate of return on Pennzoil’s stock is 16%. According to the discounted-dividend model, what shouldPennzoil’s current share price be?5.23The Webster Co. has just paid a dividend of $5.25 per share. The company will increase itsdividend by 14 percent next year. The company will then reduce its dividend growth rate by three percent each year until the dividend reaches the industry average of five percent growth. Thecompany will maintain that dividend growth rate, forever. The required rate of return for theWebster Co. is 14 percent. What is the price of the stock?Estimates of Parameters in the Dividend-Discount Model5.24Allen, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter,the dividend will grow at a constant annual rate of four percent, forever. The current stock price is $30. What is next year’s dividend payment if the required rate of return i s 12 percent?5.25The newspaper reported last week that Bradley Enterprises earned $20 million this year. Thereport also stated that the firm’s return on equity is 14 percent. Bradley retains 60 percent of itsearnings.a.What is the firm’s earnings growt h rate?b.What will next year’s earnings be?5.26Juggernaut Satellite Corporation earned $10 million for the fiscal year ending yesterday. The firmalso paid out 25 percent of its earnings as dividends yesterday. The firm will continue to pay out25 percent of its earnings as annual, end-of-year dividends. The remaining 75 percent of earningsis retained by the company for use in projects. The company has 1.25 million shares of commonstock outstanding. The current stock price is $30. The historical return on equity (ROE) of 12percent is expected to continue in the future. What is the required rate of return on the stock?5.27Four years ago, Bling Diamond, Inc. paid a dividend of $.80 per share. Bling paid a dividend of$1.66 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow at eight percent per year. The requiredreturn on the stock is 18 percent. What will Bling Diamond’s cash dividend be in seven years? Growth Opportunities5.28Rite Bite Enterprises sells toothpicks. Gross revenues last year were $3 million, and total costswere $1.5 million. Rite Bite has 1 million shares of common stock outstanding. Gross revenuesand costs are expected to grow at five percent per year. Rite Bite pays no income taxes. Allearnings are paid out as dividends.a.If the appropriate discount rate is 15 percent and all cash flows are received at year’s end,what is the price per share of Rite Bite stock?b.Rite Bite has decided to produce toothbrushes. The project requires an immediate outlayof $15 million. In one year, another outlay of $5 million will be needed. The year afterthat, net cash inflows will be $6 million. That profit level will be maintained inperpetuity. What effect will undertaking this project have on the price per share of thestock?5.29California Real Estate, Inc., expects to earn $100 million per year in perpetuity if it does notundertake any new projects. The firm has an opportunity to invest $15 million today and $5million in one year in a real estate. The new investment will generate annual earnings of $10million in perpetuity, beginning two years from today. The firm has 20 million shares of common stock outstanding, and the required rate of return on the stock is 15 percent. Land investments are not depreciable. Ignore taxes.a.What is the price of a share of stock if the firm does not undertake the new investment?b.What is the value of the investment?c.What is the per-share stock price if the firm undertakes the investment?5.30The annual earnings of Avalanche Skis Inc. will be $4.00 per share in perpetuity if the firm makesno new investments. Under such a situation, the firm would pay out all of its earnings asdividends. Assume the first dividend will be received exactly one year from now.Alternatively, assume that three years from now, and in every subsequent year in perpetuity, the company can invest 25% of its earnings in new projects. Each project will earn40% at year-end, in perpetuity. The firm’s discount rate is 14 percent.a.What is the price per share of Lewis Skis Inc. stock today without the company makingthe new investment?b.If Avalanche announces that the new investment will be made, what will the per-sharestock price be today?Price-Earnings Ratio5.31Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported cash flows of$800,000 and have 500,000 shares of common stock outstanding. Without new projects, bothfirms will continue to generate cash flows of $800,000 in perpetuity. Assume that the cash flows are equal to earnings. Assume both firms require a 15 percent rate of return.a.Pacific Energy Company has a new project that will generate additional cash flows of$100,000 each year in perpetuity. Calculate the P/E ratio of the company.b.U.S. Bluechips has a new project that will increase cash flows by $200,000 in perpetuity.Calculate the P/E ratio of the firm.。
会计学原理 约翰·J·怀尔德 Chap005
P1
Purchase Discounts
On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, credit terms are 2/10, n/30.
Dr. 27,000 Cr. 27,000
4-4
C1
Merchandising Activities
Service organizations sell time to earn revenue.
Examples: Accounting firms, law firms and plumbing services
Revenues
Minus
4-10
P1
Merchandise Purchases
Invoice
Main Source, Inc.
614 Tech Avenue Nashville, TN 37651
S o l d T o
Invoice
Date 5/4/09 Number 358-BI
Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501 Terms 2/10,n/30 Description 250 Backup System Ship: FedEx Prepaid Quanity Price 500 $ 54.00
4-7
C2
Operating Cycle for a Merchandiser
Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. Cash Sale
Chapter_05
5-3
Future Values
• Suppose you invest $1000 for one year at 5% per year. What is the future value in one year? • Interest = 1000(.05) = 50 • Value in one year = principal + interest = 1000 + 50 = 1050 • Future Value (FV) = 1000(1 + .05) = 1050 • Suppose you leave the money in for another year. How much will you have two years from now? • FV = 1000(1.05)(1.05) = 1000(1.05)2 = 1102.50
• What is the present value of $500 to be received in 5 years? 10 years? The discount rate is 10% • 5 years: N = 5; I/Y = 10; FV = 500 CPT PV = -310.46 • 10 years: N = 10; I/Y = 10; FV = 500 CPT PV = -192.77
• How much would you have at the end of 15 years using compound interest? • How much would you have using simple interest?
新编金融英语教程 Chapter4 Interest Rate
4.2 Key Points
4.2.1 Time Value of Money
￥$
Time Value of Money
It is very likely that the willingness to postpone purchases into the future stems from the reward, namely the interest rate.
The lender will charge the borrower a risk premium so as to
ensure that he will be compensated for a possible loss of
money.
Delayed consumption
People prefer to buy goods at a later time. As a result, there will often be a positive interest rate
4.2 Key Points
4.2.2 Definition of the Interest Rate
￥$
Interest Rate
It is often defined as the proportion of an amount loaned, which a lender charges an interest to the borrower, normally expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money or the rate a bank pays its savers for keeping money in an account. The annual interest rate is the rate over a period of one year. Other interest rates apply over different periods, such as a month or a day, but they are usually annualized.
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2015-2-16
Chapter 5 Interest Rate
9
Compounding: Future Values
◆Getting back to our example, let’s say that you leave your $100
deposit in the bank for two years at 5 percent interest per year. At the end of the first year you would receive $100×(1+0.05)=$105
3
1. The Time Value of Money
◆The willingness to postpone purchases into the future is a function of the reward—that is, the interest rate. ◆The higher the interest rate, the greater the reward and, hence, the greater the willingness to postpone purchases into the future and lend in the present.
1). Compounding: Future Values
◆What is the future value of one dollar deposited in an interestbearing account today? To answer this question, let’s start with a definition: future value is the value on some future date of an investment made today.
The Time Value of Money
◆ Lending in the present enables spending in the future the sum of what is lent plus the interest earned.
◆Borrowing in the present enables spending in the present, but
Future Value $105.00 $110.25 $115.76 $121.55 $127.63 $134.01 $140.71 $147.75 $155.14 $162.89
2015-2-16
Chapter 5 Interest Rate
12
Compounding: Future Values
10
Compounding: Future Values
◆Or, equivalently,
$100×(1+0.05)×(1+0.05)=$100×(1+0.05)²
◆Extending it to three years, four years, or more just means
multiplying by (1.05) over and over again.
Chapter 5
Interest Rate
Objectives
1. The Time Value of Money 1). Compounding: Future Values 2). Present Value
2. Real and Nominal Interest Rates
Interest Rate
◆Using this computation, we can derive a general formula for
future value. FVn= PV×(1+i)n (2)
2015-2-16
Chapter 5 Interest Rate
13
2). Present Value
◆Present value is the value in the present of a payment that is promised to be made in the future. ◆Put another way, present value is the amount that must be invested today in order to realize a specific amount on a given future date.
requires paying back in the future what is borrowed plus interest.
◆Since the interest rate is the return on lending and the cost of borrowing, it plays a pivotal role in spending, saving, borrowing, and lending decisions made in the present and bearing on the future.
i.e. Today you invest $100 in a savings account that guarantees 5 percent interest per year. After one year, you’ll have $105 (the investment at its present value of $100 plus $5 in interest). So the future value of $100 one year from now at an interest rate of 5 percent is $105.
◆Money represents purchasing power; a person who has money
can purchase goods or services now.
◆If someone does not have money now and wants to make
purchases, he/she can rent purchasing power by borrowing.
Compounding: Future Values
Table 5.1 Computing the Future Value of $100 at 5% annual interest rate
Years into Future 1 2 3 4 5 6 7 8 9 10
Computation $100×(1.05) $100×(1.05)2 $100×(1.05)3 $100×(1.05)4 $100×(1.05)5 $100×(1.05)6 $100×(1.05)7 $100×(1.05)8 $100×(1.05)9 $100×(1.05)10
2015-2-16
Chapter 5 Interest Rate
14
Present Value
◆To understand the calculation of present value, go back to future value. Remember that at a 5 percent interest rate, the future value one year from now of a $100 investment today is $105. It follows that at this same 5 percent interest rate, the present value of $105 one year from now is $100. All we did was invert the future value calculation. ◆In general terms, reversing the calculation in equation (1), we obtain PV= FV / (1+i ) (3)
◆Then you leave this $105 deposit in the bank and at the end of
the second year you would receive $105×(1+0.05)=$110.25
2015-2-16
Chapter 5 Interest Rate
◆Present value=Future value of the payment divided by (One plus the interest rate)
2015-2-16
Chapter 5 Interest Rate
15
Present Value
What happens if the payment is going to be made in two years, in three years or more?
$100
Present value of the investment
+$100×(0.05)
+ Interest
=$105
=Future value in one year
In general, the future value FV of an investment with a present value, PV, invested at an interest rate i is FV=PV+ PV×i= PV×(1+ i) (1)
2015-2-16
Chapter 5 Interest Rate
6
The Time Value of Money
◆The interest rate represents the time value of money because it specifies the terms upon which one can trade off present purchasing power for future purchasing power.