Money and Banking

- Compare and contrast the two types of asymmetric information

2.How can the adverse selection problem explain why you are more likely to make a loan to a

family member than to a stranger?

- Why might you be willing to make a loan to your neighbor by putting funds in a savings account

earning 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate

rather than lend her the funds yourself?

- What is the current price of a coupon bond with a face value of $1,000 that matures in three

years and provides coupon payments of $50 per year? The interest rate that prevails in the market

is 4%.

5.Suppose you want to buy a new Ford Mustang for $20,000. So, you take out a loan of $20,000

from a bank and in each of the next five years you will make equal payments of X at an interest rate of 10% to pay off the loan. What number is X equal to? (hint: X is the fixed dollar payment that you pay each year such that you pay off the loan in exactly five years

- Suppose you buy a treasury bill that will give you a 5%(nominal) interest rate a year from now

and face a 20% percent tax rate. The economists at the Federal Reserve project the inflation to be

2% next year. What (pre-tax) real interest rate do you expect to receive a year from now? What after

-tax real interest rate do you expect to receive a year from now?

Last Updated on September 8, 2019 by Essay Pro