1 suppose the interest rate for a one-period bond is 4a

Reference no: EM13374733

1. Suppose the interest rate for a one-period bond is 4%.

(a) What is the price of an asset paying (1,1,1)whichmeans 1 after 1 period, 1 after 2 periods, and 1 after 3 periods.

(b) What is the price of an asset paying (1.5,0,1.5)?

(d) What is the price of an asset paying (0,0,3,0,0,3,0,0,3)?

2. Suppose the interest rate for a one-period bond is 4% between the current period and the next. Then the rate becomes 5% for ever.

(a) What is the price of an asset paying (1,1,1)whichmeans 1 after 1 period, 1 after 2 periods, and 1 after 3 periods.

(b) What is the price of an asset paying (1.5,0,1.5)?

(d) What is the price of an asset paying (0,0,3,0,0,3,0,0,3)?

3. Suppose that the one-period rate is 4%. Explain why a two-period rate of 6% cannot be an equilibrium when individuals expect the one-period rate to remain constant.

4. Suppose that the one-period rate is 4% and that the two-period rate is 6%. What sort of expectation for the one-period rate next period makes this situation an equilibrium?

5. Consider an asset paying 1 next period and 2 in two periods. Suppose that the one-period rate is 4% and that it will remain constant. Show that a price of 2.5 is not an equilibriumprice for this asset.

6. Suppose that the annual rate of interest is 4%.

(a) What is themonthly rate?

(b) Consider a 3-year lease on a car that is worth $20,000 today. The ?rst payment on the lease is next month. After 3 years the price of the car is estimated at $15,000. What is themonthly rent?

Reference no: EM13374733

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