1.

Calculate the yields to maturity for the following bonds:

Face Value Price Maturity

period
1 200 120 5 years

2 200 150 10 years

3 150 120 3 years

4 150 110 5 years

5 100 80 10 years

2. Calculate the price of the following bonds:

Face Value Yield Maturity

period
1 200 5% 5 years

2 200 8% 10 years

3 150 10% 3 years

4 150 10% 5 years

5 100 6% 10 years

3. Calculate the maturity period of the following bonds

Face Value Yield Price

1 200 9% 130

2 200 7% 165

3 150 5% 115

4 150 5% 125

5 100 10% 60
4. Imagine an economy where individuals live for only three periods, youth, middle age and
retirement. They start working in their youth, and do not work in retirement. They earn Rs 100 in their
youth, Rs 200 in middle age, and nothing in retirement. Taxes, the interest rate, and inflation are all 0.
i. What is the highest level of consumption they can enjoy assuming consumption is equally
distributed in all three periods?
ii. What is the level of financial wealth – positive savings or debt – in each period?
iii. If there are 100 young people, 100 people in retirement, and 300 people in middle-age, what
would be the total amount of savings in the economy?
iv. Imagine that the young want to consume Rs 120 every year, and the old wish to maintain their
consumption at Rs 100. What is the level of financial wealth in each period? By how much
should consumption of the middle-aged fall to ensure zero net savings over all three periods?
v. Now imagine that there are 200 young people, 200 old, and 200 middle-aged. What is the
total amount of savings in the economy (assuming the young wish to consume Rs 120, and
the middle-aged and old both consume Rs 100).
vi. What do you think would happen to total savings in an economy if the proportion of the
young and old were to increase?

5. Imagine an economy where individuals work for four periods. Their starting salary is Rs 10 lakhs,
and they begin work in the first year. The tax rate is 30%. Their salary grows by 5% every year. The
real interest rate is 0.
i. What is the highest level of consumption they can enjoy assuming consumption is equally
distributed in all periods?
ii. What is the amount of savings or debt in each period?
iii. Imagine that the income grows by 10% and not 5% in period 3, and grows at 5% in period 4.
Calculate average consumption. What is the difference between consumption in this scenario
and in the previous scenario?