...started for your class: • Unit 4 start date: ____07/23/2014_____________ Question 1 (10 points) 1. You decide to take out a simple interest loan for $5000, at 7% yearly interest on the date that unit 4 starts for you. If you repay the loan on December 31st (at the end of the current year)... a) How much do you pay total when you pay off the loan? 5,000 x .07 x .041= 5,143.50 b) How much interest do you pay? 143.50 Question 2 (15 points) 2. You decide to take out a $20000 simple interest loan at 4%, on the date unit 4 started for you. a) In 45 days you decide to pay off $8000 of the loan. What is your new principal? Explain how you got the answer. 20,000 x .04x .33= 264 20,000 + 264= 20,264 20,264 - 8000= 12,264 b) 30 days after the first payment, you pay another $6000. What is your new principal? Explain how you got the answer you did.12,264 – 6,000= 6,264 c) 45 days after the 2nd payment, your loan comes due. How much do you need to pay then? Explain your reasoning. 6,264.00 The 4% interest was calculated at the onset of the loan for 120days. 20,264 -14,000= 6,264 Question 3 (5 points) 3. You need $400 badly, and decide to write a check at a check cashing place to get that money. Assuming you much write the check for $500 to get the $400 in cash, and the check will be cashed in 2 weeks, what simple interest rate did you just pay? Assume 52 weeks in a year for this problem...
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...Exam 2 Study Guide Chapter 6: Interest Rates 1. Using the yield curve to predict interest rates (section 6-6) 2. Determinants of market interest rates (section 6-3) Be sure you know how to calculate any given components with given supporting information. 3. What determines the shape of a yield curve (section 6-5) Practice problems: 6-2, 6-3, 6-4, 6-5, 6-7, 6-9, 6-11, 6-14 Chapter 7: Bond Valuation 1. Key characteristics of bonds (7-2) 2. Bond valuation (7-3) 3. Bonds with semi-annual coupons (7-6) 4. Assessing a bond’s risk (7-7) 5. Bond yields (7-7) Practice problems: 7-1, 7-2, 7-3, 7-4, 7-5, 7-8, 7-9, 7-16 Chapter 8: Risk & rates of Return 1. Stand-Alone risk (8-2) 2. Risk in a portfolio context (8-3) 3. Relationship between risk and rate of return (8-4) 4. Implications for corporate managers & investors (8-6) Practice problems: 8-1, 8-3, 8-4, 8-6, 8-7, 8-11, 8-12, 8-14 *In addition please review the Cengage assignments & Team application activities that apply to the above chapters. Important note: Please note that this is only a study guide and should not be taken as the actual content of your second exam. In other words, reading the sections above and attempting the problems recommended should put you in a comfortable position to handle majority of questions in the exam. It is therefore prudent to expand your preparation beyond this...
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...Interest rates are considered to be the price of holding money and the opportunity cost of any investment. After analyzing interest rates in our course do you think that interest rate in Egypt reflects the real opportunity cost of holding money? Why or why not? Please support your answer with all the references you have searched. Interest Rate is: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest is charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out. That’s why interest rate should cover the opportunity cost of lending the money to the borrower. Also, interest rate should cover the inflation rate in the economy, as by time the lender receives the principal again due to inflation, the money will be of less value than when first lent to the borrower. So, if the interest rate doesn’t cover both the opportunity cost and inflation, it’ll be irrational decision to lend the money. For example, if the lender can invest in some real estate and construction projects with an average return of 10% & if inflation is 10%, then the interest rate should be more than 20% to be rational choice for the lender to lend the money. Interest rate in Egypt: (Lending Interest Rate) So, The lending interest rate is now at 9.75% annually, so, does this rate covers the inflation rate & opportunity cost of investing...
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...industry began to fail, the US Treasury increased the interest rate on Treasury bills as a way to bring more money back to the government. As you can see from the graph, in 2009 a 1 year Treasury bill had an average interest rate of 0.55%. Throughout the short recession, the interest rate remained above 0.20% because Treasury bills were not in high demand. People had their own financial troubles, so very few could afford to send money to the government. In the first few quarters of 20122, you can see a drop in the interest rate. This was a result of the recession coming to an end. More people were able to buy Treasury bills, lowering the interest rate. In early 2012, the interest rate rose slightly, then dropped off to 0.12%, where it has remained steady since. Taking a look at the four week, three month, and six month Treasury bills, you can see the same trends. In the first quarter of 2011, the four week bill dropped substantially, from 0.10% to 0.02% and remained there until the economy began to pick back up. Notice the steady rise during 2012, and then another drop off during the second quarter of 2013. This means more people were buying Treasury bills. The three and six month Treasury bills were very similar during the recession. At the beginning of 2009, those bills were relatively high in interest rates. As there was a larger demand, the interest rates began to drop off, until 2012, when demand eased up and the interest rates began to rise again. During 2013, both these...
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...------------------------------------------------- Interest rates are considered to be the price of holding money and the opportunity cost of any investment. After analyzing interest rates in our course do you think that interest rate in Egypt reflects the real opportunity cost of holding money? Why or why not? Please support your answer with all the references you have searched. Interest Rate is: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest is charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out. That’s why interest rate should cover the opportunity cost of lending the money to the borrower. Also, interest rate should cover the inflation rate in the economy, as by time the lender receives the principal again due to inflation, the money will be of less value than when first lent to the borrower. So, if the interest rate doesn’t cover both the opportunity cost and inflation, it’ll be irrational decision to lend the money. For example, if the lender can invest in some real estate and construction projects with an average return of 10% & if inflation is 10%, then the interest rate should be more than 20% to be rational choice for the lender to lend the money. Interest rate in Egypt: (Lending Interest Rate) So, The lending interest rate is now at 9.75% annually, so, does this rate covers...
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...With HACK's bank recent cut on interest rate 12 months earlier, loan base has grown, however profit has not, this is due to the fact that lowering interest rate does not necessary mean a rise in profit as consumers may refuse to hold the bank's money and present it to a rival bank, thus does not return to the Hack bank, subsequently causing a fall in security investments and deposits as well as a loss in an interest earning asset. In other words, the non banking public does not want to hold funds with HACK bank possibly due to competitive interest rates for deposits or stability. Although it would seem logical for the bank to lower credit standards or reduce interest rate in order to advance credit and increase profit. It is not necessarily the right thing to do, as the non banking public seek to hold the bank's deposits in a hostile free bank, with minimal risk. Consequently the non banking public will turn away from institution who offer a lower credit standard or lower interest rate due the possibility of non repayment thus consequently could impact the non banking publics asset, this is one of the many reasons why the non banking public refuse to hold funds with a bank that lowers their standards. Instead of lowering rates, HACK bank should be paying competitive rates, to indicate to the market that they can keep up and is stable enough to hold funds. Although HACK bank's loan base has increased, its cut on interest rate, has not benefited in the liquidity side of things...
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...Compound Interest 1.) Result of calculations. P(t) = P(0) e^(kt) P(0) = $1000.00 K = 0.5% = 0.005 | K = 1% = 0.01 | K = 1.5% = 0.015 | P(1) = 1005.01 | P(1) = 1010.50 | P(1) = 1015.11 | P (5) = 1025.32 | P(5) = 1051.27 | P(5) = 1077.88 | P (10) = 1051.27 | P(10) = 1105.17 | P(10) = 1161.83 | Time (T(k)) when your investment is doubling K= 0.5% | T(0.5%) | Round to whole number = 139 years | Round to tenths=138.6 | K=1% | T(1%) | Round to whole number = 69 years | Round to tenths= 69.3 | K=1.5% | T(1.5%) | Round to whole number = 46 years | Round to tenths= 46.2 | 2.) What affect did changing the interest rate have on the rate at which your investment grew? Changing the interest rate from 0.5% to 1% to 1.5% increased the rate overall of the investment such that when the interest rate was 1% at 5 years the amount of 1051.27 which increased to the amount of 1077.88 at the same year at a higher interest rate of 1.5%. As the interest rate grew higher and higher, the rate of the investment also grew higher. 3.) What affect did changing the interest rate have on the doubling time (time until your deposit doubled in size)? When the interest rate was lower, the number of years at which the investment doubled from $1000.00 to $2000.00 was higher. In my opinion, doubling the amount at the interest rate of 0.5% is somewhat unrealistic because the amount of years it is taking is almost 139 years which is not possible for a person life. When the interest rate...
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...Assignment #3 Intrest rates are considered to be the price of holding money and the opportunity cost of any investment. After analysing intrests rates in our course do you think that interest rate in Egypt reflect the real opportunity cost of holding money? why or why not? Please support your answer with all the references you have searched. The opportunity cost of holding money is the cost that could be realized if money were invested instead of held. In other words, it is the interest rate that money is earning in a chosen investment. Typically, it is the interest rate that is set on a bond, particularly a government bond. Given the other investment choices that could be made, this cost could be very different from one person or entity to another. To determine the true opportunity cost of holding money, it is necessary to first determine what the investment vehicle would have been. After that, the next step is to research what the interest rate would be on that investment strategy. If the annual percentage rate is a single percent, then one percent annually would be the opportunity cost of holding onto the money. Assigning a definite value would require first knowing how much money was being held, and how long it would be held for. In economics, investing and holding money are known as mutually exclusive choices. This means that both cannot be done at the same time with the same money. If the money is being invested, it cannot be held. It may be possible for an individual...
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...Interest Rates and Agriculture Interest rates significantly impact agricultural markets in a number of ways. An interest rate is the cost of a loan, or the amount a lender will charge for a loan. In general, when interest rates are high, loans are more expensive, and when interest rates are low, loans are cheaper. As this analysis will demonstrate, interest rates are a macroeconomic factor that can have a significant impact on the microeconomics of agricultural businesses in three major areas of operations: cost of storing inventory, business investments, and general operating risk. First, the cost of storing inventory increases when interest rates increase. If instead of holding inventory, the inventory is sold, the income from that sale would lower the burden of increased interest rates on small businesses. Therefore, the opportunity cost of storing inventory increases when interest rates increase. Second, whether a business invests in land, machinery, or other resources is determined in part by interest rates. Investments are only made if the investor can expect to get a return on the investment that is higher than the costs associated with the interest rate. For agricultural businesses, which rely heavily on investments in land, the interest rate is a crucial consideration. Third, there is the general risk associated with interest rates that, if they rise, farm businesses might suddenly lose value, land investments might become more expensive than planned, or operating...
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...Intererest and risk on Bond One attribute of a bond that influences its interest rate is its risk of default, which occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or pay off the face value when the bond matures. A corporation suffering big losses, such as Chrysler Corporation did in the 1970s, might be more likely to suspend interest payments on its bonds.1 The default risk on its bonds would therefore be quite high. By contrast, U.S. Treasury bonds have usually been considered to have no default risk because the federal government can always increase taxes to pay off its obligations. Bonds like these with no default risk are called default-free bonds. (However, during the budget negotiations in Congress in 1995 and 1996, the Republicans threatened to let Treasury bonds default, and this had an impact on the bond market, as one application following this section indicates.) The spread between the interest rates on bonds with default risk and default-free bonds, called the risk premium, indicates how much additional interest people must earn in order to be willing to hold that risky bond. Our supply and demand analysis of the bond market in Chapter 5 can be used to explain why a bond with default risk always has a positive risk premium and why the higher the default risk is, the larger the risk premium will be. To examine the effect of default risk on interest rates, let us look at the supply and demand diagrams for the default-free...
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...Simple Interest Simple interest is when interest is only charged on principal -- that is, the original amount of the debt or investment. For instance, if you deposit money into a bank account that pays only simple interest, it will only pay you interest based on the original deposit amount. It will not pay interest on the additional funds in your account that came from its interest payment. Simple Interest Example Assume that you deposit $5,000 into an account that pays a simple interest of 5 percent per year, deposited annually to your account. After one year, the bank will pay you 5 percent of the $5,000, so $250 will be added to your account. This means that your account will now have $5,250 in it. After another year, you will again receive an interest payment -- but only on the original $5,000 principal, not the $5,250 that is now in your account. So you would receive another $250, giving you a total of $5,500 after two years. Compound Interest When compound interest is applied, interest is paid on both the original principal and on earned interest. If you make a deposit into a bank account that pays compounded interest, you will receive interest payments on the original amount that you deposited, as well as additional interest payments. This allows your investment to grow even more than if you were paid only simple interest. Compound Interest Example Assume once again that you are depositing $5,000 to a bank account that pays 5 percent annual interest, deposited...
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...Jeniffer Kim Theory of Interest Professor Chiacchiere How Interest is Effecting the U.S. Markets Today In 5000 BC, the lending of “food” money was commonplace in Middle East civilizations. Early loans and interest were based on agricultural produce. Because the acquired seeds and livestock could be replenished and reproduce themselves, the people could easily repay loans with interest using these goods. Throughout history, the practice of having interest charged on loans developed over the years. Today, people pay interest using various foreign currencies. It has been legal and regulated by different states, but it also has been restricted in different countries because of religious reasons. In the past, some cultures have regarded charging any interest for loans as sinful. Charging interest was known as ursury and Christians, Muslims and even Buddhists condemned those who practiced it. Although some disapproved of charging interest, there is no doubt that it has played a large role in moving the markets and impacting our society today. In the U.S., changes in interest rates can have both a positive and negative effect on the economy, inflation and recessions, and the stock and bond markets. Many may ask why people use interest in their everyday lives and how it makes a direct impact on the economy. When an individual takes out a loan from a bank or another party, there is a possibility that the borrower will not repay the money. The purpose of interest is to compensate lenders...
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...THE COMPARISON OF INTEREST AND USURY Interest is the money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt, as stated in Oxford Dictionaries. This is means as it is increase in money paid back for the loan or the money that we borrow from creditor in the monthly payment at certain rates. As for the example when our business borrows money from creditor, they commonly will charge us interest. The interest rate is determined by developing the loan contract with certain regulations that a creditor must followed. However, he has committed usury if charged on interest rate higher than the rate allowed by law or regulations. Usually interest rate is depend on the loan or the amount of money that you borrowed. It should be noted here that interest is profit earned by the company and the bank, because its services lend money to launch the company to borrow. The financial intermediaries like bank is appreciated that lend money to the company prospered. As for these services, the bank gets a decent profit, called interest or benefit. It is differ from usury. Usury is the practice of lending money at unreasonably rate or amount of interest which exceeds those permitted by law. As for example, we can seen usury in the situation of extortion to the shortness of his life. The lender who take an advantage against those who are inability to pay back the money borrowed. The poor seek the help from lender to save him from...
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...Part A: Conflict of Interest Conflict of Interest ElectroCo is a listed Company subject to Corporations Act and Listing Rules. The onus is on Company officers to act in good faith and not improperly use their position to gain an advantage for themselves or someone else. (Corporations Act 2001 Part 2D.1 s182). Attribute standard 1120 defines a conflict of interest as a person who has: * “A position of trust, has a competing professional or personal interest” * “Competing interest can make it difficult to fulfil his or her duties impartially” * “A conflict of interest exists even if no unethical or improper act results.” * A conflict of interest could impair an individual’s ability to perform his or her duties and responsibility objectively. The Contract Manager has the following conflicts: * Fails to disclose conflict of interest in tender invitation list ie brother; * Partakes in selection recommendation process whilst remaining silent about brother. * Failure to disclose conflict of interest to the CFO * Presents potential and perceived conflict with ongoing management of the service provider. WA Government Integrity Coordinating Group stresses a conflict of interest is not necessarily wrong or unethical but must be managed to ensure the interests of the organisation take preference. Personal interests such as brothers interest should not influence or be perceived to influence duty to the Company. By not disclosing the relationship...
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...NBER WORKING PAPER SERIES THE EFFECTS OF QUANTITATIVE EASING ON INTEREST RATES: CHANNELS AND IMPLICATIONS FOR POLICY Arvind Krishnamurthy Annette Vissing-Jorgensen Working Paper 17555 http://www.nber.org/papers/w17555 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2011 We thank Jack Bao, Olivier Blanchard, Greg Duffee, Charlie Evans, Ester Faia, Simon Gilchrist, Robin Greenwood, Monika Piazzesi, David Romer, Thomas Philippon, Tsutomu Watanabe, Justin Wolfers, and participants at seminars and conferences at Brookings, Chicago Fed, Board of Governors of the Federal Reserve, ECB, San Francisco Fed, Princeton University, Northwestern University, CEMFI, University of Pennsylvania (Wharton), Society for Economic Dynamics, NBER Summer Institute, the NAPA Conference on Financial Markets Research, and the European Finance Association for their suggestions. We thank Kevin Crotty and Juan Mendez for research assistance. This paper was prepared for the Brookings Papers on Economic Activity Fall 2011 issue. We have received an honorarium for the presentation of the paper at Brookings. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w17555.ack NBER working papers...
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