Answered: You work for a bank that has just made…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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You work for a bank that has just made two loans. In one, you lent $900 today in return for $1200 in one year. In the other, you lent $900 today in return for $10000 in 20 years. The difference between the loan amount and repayment amount is based on an interest rate of 8% per year. Imagine that immediately after you make the loans, news about economic growth is announced that increases inflation expectations, so that the market interest rate for loans like these jumps to 10%. Loans make up a major part of a bank’s assets, so you are naturally concerned about the value of these loans. What is the effect of the interest rate change on the value to the bank of the promised repayment of these loans?

Definition Definition Increase in the amount of goods and services produced by a country in a given period of time compared to an earlier period. Economic growth is generally coupled with a rise in national income or the purchasing power of individuals. It is often measured in terms of the increase in a country's gross domestic product (GDP), or the overall monetary value of all the complete or final services and goods that a country can produce within its domestic boundaries in a specific period.

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