Assume for simplicity that these payments continue for 20 years and then cease. The interest rate is 4% . You plan to cover this obligation by investing in 5- and20-year maturity Treasury strips.(a) What is the duration of the funds 20-year payout obligation?(b) You decide to minimize the funds exposure to changes in interest rates. How much should you invest in the 5- and 20- year strips? What will be the par value of your holdings of each strip?(c) After three months, you reexamine the pension funds investment strategy. Interest rates have increased. You still want to minimize exposure to interest rate risk. Will you invest more in 20-year strips and less in 5-year strips? Explain briefly.39. Duration and Convexity. Consider a 10 year bond with a face value of $100 that pays an annual coupon of8%. Assume spot rates are flat at 5%.(a) Find the bond's price and duration.
(b) Suppose that 10yr yields increase by 10bps. Calculate the change in the bond's price using your bond pricing formula and then using the duration approximation. How big is the difference? (c) Suppose now that 10yr yields increase by 200bps. Repeat your calculations for part (b).(d) Given that the bond has a convexity of 33.8, use the convexity adjustment and repeat parts (b) and (c). Has anything changed? 40. The yield to maturity of a 10-year zero-coupon bond is 4%. (a) Suppose that you buy the bond today and hold it for 10 years. What is your
return?

 

Assume that a consumer has a choice between the following three different air conditioner models that have the same cooling capacity but different energy efficiency ratings. The air conditioners last for ten years Model Purchase Price Annual Operating Cost 1 $200 $75 2 $250 $60 3 $300 $50 a. Calculate the total life-cycle cost for each model assuming that the AC unit is purchased at the beginning of year 1 and the annual interest rate is 10% per year

 

Calculate the equilibrium price and quantity in each period assuming that Q = 169, the discount (interest) rate used by coal suppliers is 10% per year, and coal suppliers are price takers (behaves competitively)

1) Firstly these theories misunderstand what is meant by reserve. At any point in time the size reserves is determined by current economic conditions (price of oil). As the price of oil goes up it becomes economically viable to extract oil from many already known sources. An example given in class is the Alberta Tar sands which is not viable at low prices but above $40-$50 a barrel is viable. 2) These theories also ignore the rationing of oil by the market so that if production falls then basic economics tells us that prices increase to ration the oil. That is there is no "short fall" of oil but rather a higher price. 3) When the production of oil begins to fall relative to demand (or demand increases relative to supply) then the price of oil increases. This provides incentives for exploration and technological innovation. That is resources are devoted to increasing the efficiency of oil extraction and finding new resources because the rewards to doing so are now greater

A customer of Nigel's home renovation business was scheduled to pay $18,500 in two months from now, and an additional $12,500 in seven months from now. Instead, the customer is proposing to make a small payment in four months from now, and a final payment of $25,000 in 12 months from now. Nigel's bank charges 6% compounded monthly on his business line of credit. How much should the payment in four months from now be in order for Nigel to consider the proposed payment plan equivalent to the originally scheduled payments?

2)Our customer missed a scheduled payment of $4,700 three months ago. To settle the debt, the customer is proposing to make two equal payments, one in six months from now, and the other in nine months from now. If money is worth 6.8% compounded quarterly, what must the size of the equal payments be in order for those payments to be economically equivalent to the originally scheduled payment?

3)What is the highest price an investor should pay for a $5,000 face value strip bond with 8.5 years remaining until maturity if she requires a rate of return of 4.75% compounded semiannually on her investment?

3.A seller may supply a single object to a buyer. Let x be 1 if trade takes place and 0 if not. Let tS be the amount of money that the seller receives and tB the amount that the buyer pays. Let v be the buyer's valuation and s be the seller's valuation of the object and assume preferences are quasi-linear. We can then normalize utilities so that the seller's utility is tS − cx and the buyer's utility is vx − tB. Assume the preference parameters v and c are independently drawn from a uniform distribution on [0,1]. The buyer knows v and the seller knows c. a. What is the efficient rule for trade? b. Let mS and mB be the seller's respectively the buyer's reported preference for the object. Determine the set of direct mechanisms (expressed as a function of the reports) that admit truth telling as a dominant strategy and implement efficient trade (ie. the set of Groves mechanisms). c. Show that there is a unique Groves mechanism that has the property that whenever trade does not occur, the transfer payments are set equal to zero (tB = tS = 0). Is this mechanism feasible? d. Show that there is no Groves mechanism for which the budget breaks even for all reported preferences. 

 

7. (a) The 'Law of Comparative Advantage' suggests that specialisation and trade increases world
output.
(i) Explain the meaning of the underlined term in the context of international trade.
(ii) Identify the main assumptions underlying this law.
(iii) Identify two sources of comparative advantage for the Irish economy.

(b) Ireland is a small open economy which relies very heavily on international trade.
(i) Discuss the importance of international trade to the Irish economy.
(ii) Are there any economic justifications for a government intervening in order to restrict
international trade? Outline reasons for your answer.

(c) Write a brief note on David Ricardo's contributions to economic thought.

8. (a) Discuss the factors that influence the size of the Irish labour force.

(b) 'According to the Quarterly National Household Survey (QNHS) the rate of unemployment
was 7.7% in December 2008'.
(i) Name a source, other than QNHS, for unemployment statistics in Ireland.
(ii) State, with reasons, which of the measurements of unemployment used by each of these
sources gives the most accurate estimate of Irish unemployment.

(a) The following table shows the level of National Income its Consumption, Investment and
Export components at the end of periods 1 and 2, and the level of Imports at the end of
period 1. (For the purpose of this question you may ignore the Government sector).

National Income Consumption Investment Exports Imports
Period 1 €40,000 €30,000 €15,000 €15,000 €20,000
Period 2 €50,000 €39,000 €18,000 €21,000 ?
Calculate the following, showing all your workings:
(i) Level of imports at the end of period 2;
(ii) Level of savings at the end of period 2;
(iii) Marginal Propensity to Consume (MPC);
(iv) Size of the Multiplier.

(b) 'Ireland is described as a small open economy and this affects the government's ability to
influence the level of aggregate demand in the country'.
Explain this statement, using the Circular Flow of Income diagram to support your answer.

(c) Outline the limitations of using Gross National Product at Current Market Prices when
comparing the average standard of living between two different years.

6. (a) Define each of the following terms:
(i) Current Budget Deficit;
(ii) Exchequer Borrowing Requirement;
(iii) Public Sector Borrowing Requirement;
(iv) National Debt.
(20 marks)
(b) Ireland's National Debt grew from €36bn at end of 2006 to €50.4bn at end of 2008.
(i) Outline the major reasons for the increase in National Debt.
(ii) Describe the economic consequences (positive and negative) of the increase in National
Debt in recent years.

(c) The Irish economy will experience a substantial Current Budget Deficit for 2009. You have
been employed as an Economic Advisor to the Minister for Finance.
(i) State and explain two specific courses of action (one on the revenue side and one on the
expenditure side of the Government Account) you would advise the Minister to take in
order to reduce significantly the Current Budget Deficit.
(ii) Outline the possible economic effect(s) of each course of action you have chosen.

7. (a) The 'Law of Comparative Advantage' suggests that specialisation and trade increases world
output.
(i) Explain the meaning of the underlined term in the context of international trade.
(ii) Identify the main assumptions underlying this law.
(iii) Identify two sources of comparative advantage for the Irish economy.

(b) Ireland is a small open economy which relies very heavily on international trade.
(i) Discuss the importance of international trade to the Irish economy.
(ii) Are there any economic justifications for a government intervening in order to restrict
international trade? Outline reasons for your answer.

(c) Write a brief note on David Ricardo's contributions to economic thought.

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