JNU SSS 2012 Question 70: Time value of money and bond pricing
Ms. Chi can repay a loan taken from Mr. Tao either by giving him u kg of gold today or by giving him v kg of gold after two years. The price of gold today is Rs x per gram. Ms. Chi is certain that after two years the price of gold will be Rs y per gram. If Ms. Chi chooses to repay the loan after two years, she will open a fixed deposit account at her bank today with a maturity period of two years and use the proceeds at maturity to purchase the necessary gold. Interest on such a deposit is compounded annually and is paid on the date of maturity. The rate of interest for a two-year fixed deposit is r percent per annum. Every year the interest paid into Ms. Chi's fixed deposit account will be taxed at the rate of t percent. Ms. Chi will decide when to repay the loan on the basis of which option will cost her the least amount of money today.
If u=v=0⋅16, x=2000, y=2500, r=12⋅5, t=0, when will Ms. Chi repay the loan?
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Ms. Chi can repay a loan taken from Mr. Tao either by giving him u kg of gold today or by giving him v kg of gold after two years. The price of gold today is Rs x per gram. Ms. Chi is certain that after two years the price of gold will be Rs y per gram. If Ms. Chi chooses to repay the loan after two years, she will open a fixed deposit account at her bank today with a maturity period of two years and use the proceeds at maturity to purchase the necessary gold. Interest on such a deposit is compounded annually and is paid on the date of maturity. The rate of interest for a two-year fixed deposit is r percent per annum. Every year the interest paid into Ms. Chi's fixed deposit account will be taxed at the rate of t percent. Ms. Chi will decide when to repay the loan on the basis of which option will cost her the least amount of money today. If u = v = 0·16, x = 2000, y = 2500, r = 12·5, t = 0, when will Ms. Chi repay the loan? (A) Today (B) After two years (C) She will be indifferent between (a) and (b) (D) More information is necessary to provide the answer
Also written as: Ms. Chi can repay a loan taken from Mr. Tao either by giving him u kg of gold today or by giving him v kg of gold after two years. The price of gold today is Rs x per gram. Ms. Chi is certain that after two years the price of gold will be Rs y per gram. If Ms. Chi chooses to repay the loan after two years, she will open a fixed deposit account at her bank today with a maturity period of two years and use the proceeds at maturity to purchase the necessary gold. Interest on such a deposit is compounded annually and is paid on the date of maturity. The rate of interest for a two-year fixed deposit is r percent per annum. Every year the interest paid into Ms. Chi's fixed deposit account will be taxed at the rate of t percent. Ms. Chi will decide when to repay the loan on the basis of which option will cost her the least amount of money today. If u = v = 0*16, x = 2000, y = 2500, r = 12*5, t = 0, when will Ms. Chi repay the loan?
Time value of money and bond pricing has come up 20 times in 5 exams since 2010.
What this question tests
This question is on Present value, discounting and compounding, part of Time value of money and bond pricing in Macroeconomics.
Comparing money at different dates.
TestStop has 12 past-paper questions on this subtopic.
