Suppose you just bought an annuity with 11 annual payments of $16,100 at the current interest rate of 12.75 percent per year. a.
What is the value of the investment at the current interest rate of 12.75 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What happens to the value of your investment if interest rates suddenly drop to 7.75 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What happens to the value of your investment if interest rates suddenly rise to 17.75 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
1 answer:
Answer and Explanation:
a. The value of the investment is shown below:
Given that,
Future value = $0
Rate of interest = 12.75%
NPER = 11 years
PMT = $16,100
The formula is shown below:
= -PV(Rate;NPER;PMT;FV;type)
So, after applying the above formula, the present value is $92,543.17
b. If the interest rate drop to 7.75%, so the present value is $116,344.48
c. If the interest rate rise to 17.75% so the present value is $75,670.82
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Answer:
A supply shock is an unpredictable incident that changes the supply of a product or a service, subsequent in an unexpected modification in its value. Supply shocks can be undesirable (decreased supply) or optimistic (increased supply)
(a) The two types of shock which are:
- Primarily the growth in oil values is a negative supply shock causing from a decline in supply of oil
- The reduction in oil charges is a Positive supply shock causing from a growth in supply of oil.
(b) If the charges of oil increases as in case (i) that will push companies’ prices and thus decrease SRAS. The new equilibrium will be established at a inferior level of output and higher charge level. This is reflected in the diagram attached.
In the case (ii), the opposed of this will occur. The SRAS will rise shifting the SRAS rightward and carry about a new equilibrium at upper level of output and lesser prices.
