Deck 11: Extension: A: Asset Markets

Question 1

Ashley, has discovered another wine, wine D.Wine drinkers are willing to pay 40 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 20 dollars each year that the wine ages.The interest rate is 10%.How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

A)200 dollars
B)40 dollars
C)93 dollars
D)440 dollars
E)71 dollars

Answer 1

93 dollars

Question 2

A bond has a face value of 1,000 dollars.It will pay 100 dollars in interest at the end of every year for the next 42 years.At the time of the final interest payment, 42 years from now, the company that issued the bond will redeem the bond at face value.That is, the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

A)1,000 dollars
B)5,200 dollars
C)4,200 dollars
D)More than any of the above amounts.
E)Less than any of the above amounts.

Answer 2

1,000 dollars

Question 3

The price of an antique is expected to rise by 9% during the next year.The interest rate is 11%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 900 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique? (See Problem 5.)

A)8,181.82 dollars
B)18,900 dollars
C)900 dollars
D)45,000 dollars
E)9,000 dollars

Answer 3

45,000 dollars

Question 4

Chillingsworth has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth.But Shivers has a larger house.Shivers's annual fuel bill for home heating is 700 dollars per year.Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 700 dollars, plan B would cost him 1,200 dollars, and plan C would cost him 7,700 dollars.If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

A)Plan A.
B)Plan B.
C)Plans A and B are equally good.
D)Plan C.
E)He is best off using none of the plans.

Question 5

Chillingsworth has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth.But Shivers has a larger house.Shivers's annual fuel bill for home heating is 1,100 dollars per year.Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 1,100 dollars, plan B would cost him 2,000 dollars, and plan C would cost him 12,100 dollars.If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

A)Plan A.
B)Plans A and B are equally good.
C)Plan B.
D)Plan C.
E)He is best off using none of the plans.

Question 6

Chillingsworth has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth.But Shivers has a larger house.Shivers's annual fuel bill for home heating is 900 dollars per year.Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 900 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 9,900 dollars.If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

A)Plans A and B are equally good.
B)Plan B.
C)Plan A.
D)Plan C.
E)He is best off using none of the plans.

Question 7

A bond has a face value of 2,000 dollars.It will pay 200 dollars in interest at the end of every year for the next 42 years.At the time of the final interest payment, 42 years from now, the company that issued the bond will redeem the bond at face value.That is, the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

A)8,400 dollars
B)2,000 dollars
C)10,400 dollars
D)More than any of the above amounts.
E)Less than any of the above amounts.

Question 8

Ashley, has discovered another wine, wine D.Wine drinkers are willing to pay 30 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages.The interest rate is 10%.How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

A)330 dollars
B)150 dollars
C)69 dollars
D)30 dollars
E)56 dollars

Question 9

The price of an antique is expected to rise by 5% during the next year.The interest rate is 10%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 500 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique? (See Problem 5.)

A)5,000 dollars.
B)10,000 dollars
C)10,500 dollars
D)500 dollars
E)5,000 dollars

Question 10

Ashley,has discovered another wine, wine D.Wine drinkers are willing to pay 60 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages.The interest rate is 10%.How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

A)84 dollars
B)150 dollars
C)60 dollars
D)660 dollars
E)86 dollars

Question 11

The price of an antique is expected to rise by 4% during the next year.The interest rate is 9%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 400 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique? (See Problem 5.)

A)400 dollars
B)8,400 dollars
C)4,444.44 dollars
D)8,000 dollars
E)4,000 dollars

Question 12

The price of an antique is expected to rise by 8% during the next year.The interest rate is 10%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 800 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique? (See Problem 5.)

A)40,000 dollars.
B)800 dollars
C)8,000 dollars.
D)16,800 dollars
E)8,000 dollars

Question 13

A bond has a face value of 4,000 dollars.It will pay 400 dollars in interest at the end of every year for the next 40 years.At the time of the final interest payment, 40 years from now, the company that issued the bond will redeem the bond at face value.That is, the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

A)More than any of the amounts below.
B)20,000 dollars
C)16,000 dollars
D)4,000 dollars
E)Less than any of the above amounts.

Question 14

A bond has a face value of 10,000 dollars.It will pay 1,000 dollars in interest at the end of every year for the next 48 years.At the time of the final interest payment, 48 years from now, the company that issued the bond will redeem the bond at face value.That is, the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

A)58,000 dollars
B)10,000 dollars
C)48,000 dollars
D)More than any of the above amounts.
E)Less than any of the above amounts.

Question 15

A bond has a face value of 1,000 dollars.It will pay 100 dollars in interest at the end of every year for the next 44 years.At the time of the final interest payment, 44 years from now, the company that issued the bond will redeem the bond at face value.That is, the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

A)1,000 dollars
B)5,400 dollars
C)4,400 dollars
D)More than any of the above amounts.
E)Less than any of the above amounts.

Question 16

Ashley, has discovered another wine, wine D.Wine drinkers are willing to pay 70 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 10 dollars each year that the wine ages.The interest rate is 10%.How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

A)770 dollars
B)100 dollars
C)70 dollars
D)75 dollars
E)91 dollars

Question 17

The price of an antique is expected to rise by 6% during the next year.The interest rate is 7%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 600 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique? (See Problem 5.)

A)12,600 dollars
B)60,000 dollars
C)600 dollars
D)8,571.43 dollars
E)6,000 dollars

Question 18

Chillingsworth has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth.But Shivers has a larger house.Shivers's annual fuel bill for home heating is 1,200 dollars per year.Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 1,200 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 13,200 dollars.If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

A)Plan A.
B)Plan B.
C)Plan C.
D)Plans A and B are equally good.
E)He is best off using none of the plans.

Question 19

Chillingsworth has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth.But Shivers has a larger house.Shivers's annual fuel bill for home heating is 1,200 dollars per year.Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 1,200 dollars, plan B would cost him 1,900 dollars, and plan C would cost him 13,200 dollars.If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?

A)Plan B
B)Plans A and B are equally good.
C)Plan A.
D)Plan C.
E)He is best off using none of the plans.

Question 20

Ashley, has discovered another wine, wine D.Wine drinkers are willing to pay 45 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages.The interest rate is 10%.How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)

A)76 dollars
B)45 dollars
C)150 dollars
D)495 dollars
E)71 dollars

Question 21

If the interest rate is 15% and will remain 15% forever, how much would a rational investor be willing to pay for an asset that will pay him 3,450 dollars 1 year from now, 1,322 dollars 2 years from now, and nothing at any other time?

A)4,000 dollars
B)26,666.67 dollars
C)64,000 dollars
D)3,000 dollars
E)5,000 dollars

Question 22

If the interest rate is 19% and will remain 19% forever, how much would a rational investor be willing to pay for an asset that will pay him 2,380 dollars 1 year from now, 1,416 dollars 2 years from now, and nothing at any other time?

A)2,000 dollars
B)3,000 dollars
C)15,789.47 dollars
D)60,000 dollars
E)4,000 dollars

Question 23

The sum of the terms of the infinite geometric series 1, 0.83, 0.83², 0.83³, ...is closest to

A)infinity.
B)1.83.
C)5.88.
D)0.55.
E)120.48.

Question 24

If the interest rate is 5% and will remain 5% forever, how much would a rational investor be willing to pay for an asset that will pay him 6,300 dollars 1 year from now, 1,102 dollars 2 years from now, and nothing at any other time?

A)7,000 dollars
B)6,000 dollars
C)140,000 dollars
D)42,000 dollars
E)8,000 dollars

Question 25

The sum of the terms of the infinite geometric series 1, 0.78, 0.78², 0.78³, ...is closest to

A)infinity.
B)1.78.
C)0.56.
D)4.55.
E)128.21.

Question 26

The sum of the terms of the infinite geometric series 1, 0.78, 0.78², 0.78³, ...is closest to

A)0.56.
B)infinity.
C)4.55.
D)1.78.
E)128.21.

Question 27

The sum of the terms of the infinite geometric series 1, 0.95, 0.95², 0.95³, ...is closest to

A)1.95.
B)0.51.
C)20.
D)infinity.
E)105.26.

Question 28

If the interest rate is 13% and will remain 13% forever, how much would a rational investor be willing to pay for an asset that will pay him 6,780 dollars 1 year from now, 1,276 dollars 2 years from now, and nothing at any other time?

A)53,846.15 dollars
B)6,000 dollars
C)98,000 dollars
D)7,000 dollars
E)8,000 dollars

Question 29

If the interest rate is 6% and will remain 6% forever, how much would a rational investor be willing to pay for an asset that will pay him 8,480 dollars 1 year from now, 1,123 dollars 2 years from now, and nothing at any other time?

A)9,000 dollars
B)63,000 dollars
C)150,000 dollars
D)8,000 dollars
E)10,000 dollars

Question 30

The sum of the terms of the infinite geometric series 1, 0.93, 0.93², 0.93³, ...is closest to

A)1.93.
B)infinity.
C)0.52.
D)14.29.
E)107.53.