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Problem set 3 from microeconomic principles, winter 2009, by j. Wahl. The problem set covers various topics including present value, financial markets, and expected utility. Students are asked to solve problems related to tractor purchases, interest rates, oil prices, and taxation. The problems require the application of economic concepts such as inflation, taxes, and budget constraints.
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Problem set 3: present value, financial markets, and expected utility J. Wahl – Microeconomic Principles-Winter 2009
a. Suppose a zero-coupon bond with a maturity of three years is issued at a price of $800 and a face value of $1000. What is the implicit interest rate on this bond? b. Suppose you could either buy the zero-coupon bond or a bond of equal maturity and equal risk that sells for $800 and pays a coupon such that the interest rate on the latter bond is equivalent to the rate you found in part a. Which bond would you buy? Why?