25. Let r denote the one year interest rate and assume that it is constant. The

Question

25. Let r denote the one year interest rate and assume that it is constant. The present value of a payment of Sz in t years is equal to: c) (Sz)*(1-r) d) (Sz) r) 26. Bonds J and K are both zero coupon bonds, which means that they make only one payment. Bond J will pay SX in 10 years and Bond K will pay $Y in 15 years. Assume that at current interest rates both have the same present value. An increase in interest rates will: V lower the present values of both bonds and Bond J will now have a higher present value b) lower the present values of both bonds and Bond K will now have a higher present value c) raise the present values of both bonds and Bond J will now have a higher present value d) raise the present values of both bonds and Bond K will now have a higher present value 27. The government is considering two plans to cut taxes. Under option X each person will get a $1,000 tax cut for this year only. Under option Y each person will get a $1,000 tax cut each year for the next thirty years. Which of the following statements is true according to the life-cycle model? option X will raise consumption more than option Y this year option Y will raise consumption more than option X this year a) c option X and Y will raise consumption by an equal amount this year d) neither option X nor option Y will raise consumption this year 28. Suppose that interest rates rise. This will: a) raise the present values of investment projects, leading investment to rise b) raise the present values of investment projects, leading investment to fall c) lower the present values of investment projects, leading investment to rise lower the present values of investment projects, leading investment to fall

Explanation / Answer

25. PV = z/(1+r)^t. Thus the correct option is (b)

26. the interest rate on Bond J is higher than that on Bond K, an increase in the interest rate lower the present value of both the bonds and the Bond K will now have a higher present worth. When interest rate rise better to save. That imply present worth is less. The correct option is(b)

27. Option Y will raise consumption more than option X in this year. Option (b)

28. Lower the present value of investment, leading investment to fall. Investment becomes cost due to increased opportunity cost that is the interest earnings foregone. Thus the correct option is(d).

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