Pre – Mid Assignment 2

Submitted by: Eshaal Naseem

Submitted to: Ma’am Atiya Alam
Course Title: Money & Banking
Semester: 3
Section: B
Date: October 6, 2021
BUSINESS STUDIES DEPARTMENT KINNAIRD
COLLEGE FOR WOMEN LAHORE, PAKISTAN
Batch: 2020-2024

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1. A young couple is borrowing $100,000 to buy their first home. An older couple is living
off the interest income from the $100,000 in financial assets they own. How does the
interest rate affect each couple? If the interest rate increases, could that change the
behavior of either couple? How and why?

The young couple would be more willing to purchase the loan at a lower interest rate, keeping
in mind that they’ll have to repay the principle amount as well as the interest. On the contrary,
the older couple would be more willing to lend their funds at higher interest rates as they will
be generating higher returns on it.
Yes, an increase in the interest rate can cause a change in the behavior of both the couples. In
this scenario, the young couple would hesitate from taking loans being offered at high interest
rates and will wait till the interest rates are lowered. The older couple will take advantage of the
high interest rate to get more returns.

2. Assume that a bond with five years to maturity, a par value of $1,000, and a $60 annual
coupon payment costs $1,100 today. What is the coupon rate? What is the current yield?

Coupon rate= Coupon payment / Face value of bond

= $60/$1000
= 0.06
= 6%

Current yield = Coupon payment / price of bond today

= $60 / $1100
= 0.0545
= 5.45%

3. As an enrolling freshman, would you have been willing to pay $18,000 for four years’
tuition rather than $5,000 per year for four years?

Assuming that the interest rate is 6%, we’ll find the present value of $5000 per year to compare it
with the present value of $18000.
So,

=$5000 / (1+i) 1 + $5000 / (1+i) 2 + $5000 / (1+i) 3 + $5000 / (1+i) 4

= $4716.981 + $4449.982 + $4198.096 + $3960.468

= $17325.527

So in comparison to the present value of paying $5000 per year, paying $18,000 is less preferable
so as a freshman I would choose paying $5000 per year for 4 years.

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4. Henry and Sheree just had a baby. How much will they have to invest today for the baby
to have $100,000 for college in 18 years if the interest rate is 5 percent? If the interest
rate is 10 percent? PRESENT VALUE FIND

Years: 18
Interest rate: 5%
Vn: $100,000
V0: ?

V0 = Vn / (1+ i) n

= $100,000/ (1+.05)18

= $41552.06

Harry and Sheree have to invest $41552.06 today in order to have $100,000 college tuition fees in 18
years at interest rate of 5%.

Years: 18
Interest rate: 10%
Vn: $100,000
V0: ?

V0 = Vn / (1+ i) n

= $100,000/ (1+0.1)18

= $17985.87

Harry and Sheree have to invest $17985.87 today in order to have $100,000 college tuition fees in 18
years at interest rate of 10%.

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