Problem 1
Your bank offers 3 percent annual interest on savings deposits. If you deposit \(\$ 560\) today, how much interest will you have earned at the end of one year?
Problem 2
You have \(\$ 350\), which a friend would like to borrow. If you don't lend it to your friend, you could invest it in an opportunity that would pay out \(\$ 392\) at the end of the year. What annual interest rate should your friend offer you to make you indifferent between these two options?
Problem 3
If you deposit \(\$ 500\) in a savings account that offers 3 percent interest, compounded annually, and you don't withdraw any money, how much money should you expect to have in the account at the end of three years?
Problem 4
Suppose you run up a debt of \(\$ 300\) on a credit card that charges an annual rate of 12 percent, compounded annually. How much will you owe at the end of two years? Assume no additional charges or payments are made.
Problem 5
Your savings account currently has a balance of \(\$ 32,300\). You opened the savings account two years ago and have not added to the initial amount you deposited. If your savings have been earning an annual interest rate of 2 percent, compounded annually, what was the amount of your original deposit?
Problem 11
For each of the following scenarios, say whether pooling or diversification is a more promising riskmitigation strategy. [LO 11.6\(]\) a. Employees of a company who receive their salaries and health insurance from their employer and also invest their savings in that company's stocks. b. Families who are worried about losing their possessions if their houses burn down. c. Neighboring farmers who grow the same crop, which is prone to failure in dry years.
Problem 12
You have two possessions you would like to insure against theft or damage: your new bicycle, which cost you \(\$ 800\), and a painting you inherited, which has been appraised at \(\$ 55,000\). The painting is more valuable, but your bicycle must be kept outdoors and is in much greater danger of being stolen or damaged. You can afford to insure only one item. Which should you choose? Why? [LO 11.6\(]\)
Problem 13
Say whether each of the following scenarios describes an insurance problem caused by adverse selection or by moral hazard. [LO 11. 7] a. People who have homeowners insurance are less likely than others to replace the batteries in their smoke detectors. b. People who enjoy dangerous hobbies are more likely than others to buy life insurance. c. People whose parents died young are more likely than others to enroll in health insurance. d. People who have liability coverage on their car insurance take less care than others to avoid accidents.
