Macroeconomics problems

Problem Set 3

Name:

Question 1: Look at the following T-account.

Assets Liabilities

Factory: 100 Bonds: 95

Cash: 5

(Book Equity: 10)

Suppose that this company can no longer pay interest on its bond liabilities. The

company goes bankrupt, and the court liquidates its assets. The scrap value of the

factory is 50. After the bankruptcy, what will be the value of the stock of the com-

pany? What will be the value of the bonds?

Question 2: Use the same T-account before the bankruptcy. Suppose the company

can no longer pay interest on its bond liabilities. The company goes bankrupt, and the

court orders a restructuring instead of liquidation. The court finds new stockholders

will who pay 20 in cash for new stock. In addition, bondholders will lose 20 from

the value of their bonds. What is the new assets of the company? What is the new

liabilities? What is the new book equity?

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Question 3:

Draw an upward sloping supply of corporate bonds in the correct space. Now draw

a perfectly inelastic demand for corporate bonds. Show the equilibrium price.

Suppose that the government increases spending G without increasing taxes T , mean-

ing there is new issue of government bonds: the demand for corporate bonds is

less. Show the shift in the market for corporate bonds. What happens to the price of

corporate bonds? What happens to the nominal interest rate? What happens to the

quantity of corporate bonds?

Question 4:

This is a macroeconomics course, but we are learning a little about finance. Can

you use what we’ve learned in this course to make a lot of money in the stock market

in a short time? Why or why not? ALSO: There are two main reasons why we want

to study finance in macro. What are they?

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