PROBLEMS
- Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.
- The number of people at the most common ages for home-buying increases.
- People gain confidence that the economy is growing and that their jobs are secure.
- Banks that have made home loans find that a larger number of people than they expected are not repaying those loans.
- Because of a threat of a war, people become uncertain about their economic future.
- The overall level of saving in the economy diminishes.
- The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.
- Table 16.6 shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $10 million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest rate shift makes intuitive sense.
Table 16.6 Market for Loans Interest Rate Qs Qd 5% 130 170 6% 135 150 7% 140 140 8% 145 135 9% 150 125 10% 155 110 - Calculate the equity each of these people has in their home:
- Fred just bought a house for $200,000 by putting 10% as a down payment and borrowing the rest from the bank.
- Freda bought a house for $150,000 in cash, but if she were to sell it now, it would sell for $250,000.
- Frank bought a house for $100,000. He put 20% down and borrowed the rest from the bank. However, the value of the house has now increased to $160,000 and he has paid off $20,000 of the bank loan.
- The Darkroom Windowshade Company has 100,000 shares of stock outstanding. The investors in the firm own the following numbers of shares: investor 1 has 20,000 shares; investor 2 has 18,000 shares; investor 3 has 15,000 shares; investor 4 has 10,000 shares; investor 5 has 7,000 shares; and investors 6 through 11 have 5,000 shares each. What is the minimum number of investors it would take to vote to change the company’s top management? If investors 1 and 2 agree to vote together, can they be certain of always getting their way in how the company will be run?
- Imagine that a local water company issued $10,000 ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%.
- Given the change in interest rates, would you expect to pay more or less than $10,000 for the bond?
- Calculate what you would actually be willing to pay for this bond.
- Suppose Ford Motor Company issues a five year bond with a face value of $5,000 that pays an annual coupon payment of $150.
- What is the interest rate Ford is paying on the borrowed funds?
- Suppose the market interest rate rises from 3% to 4% a year after Ford issues the bonds. Will the value of the bond increase or decrease?
- How much money do you have to put into a bank account that pays 10% interest compounded annually to have $10,000 in ten years?
- Many retirement funds charge an administrative fee each year equal to 0.25% on managed assets. Suppose that Alexx and Spenser each invest $5,000 in the same stock this year. Alexx invests directly and earns 5% a year. Spenser uses a retirement fund and earns 4.75%. After 30 years, how much more will Alexx have than Spenser?
