A firm uses cloth and labor to produce shirts in a factory that it bought for $$10$ million. Which of its factor inputs are measured as flows and which as stocks? How would your answer change if the firm had leased a factory instead of buying one? Is its output measured as a flow or a stock? What about profit?

How do investors calculate the net present value of a bond? If the interest rate is $5\%,$ what is the present value of a perpetuity that pays $$1000$ per year forever?

What is the effective yield on a bond? How does one calculate it$?$ Why do some corporate bonds have higher effective yields than others?

What is the Net Present Value $($NPV$)$ criterion for investment decisions? How does one calculate the NPV of an investment project? If all cash flows for a project are certain, what discount rate should be used to calculate NPV$?$

You are retiring from your job and are given two options. You can accept a lump sum payment from the company, or you can accept a smaller annual payment that will continue for as long as you live. How would you decide which option is best? What information do you need?

You have noticed that bond prices have been rising over the past few months. All else equal, what does this suggest has been happening to interest rates? Explain.

What is the difference between a real discount rate and a nominal discount rate? When should a real discount rate be used in an NPV calculation and when should a nominal rate be used?

How is risk premium used to account for risk in NPV calculations? What is the difference between diversifiable and nondiversifiable risk? Why should only nondixersifiable risk enter into the risk premium?

What is meant by the "market return" in the Capital Asset Pricing Model $($CAPM$)?$ Why is the market return greater than the risk$-$free interest rate? What does an asset's "beta" measure in the CAPM? Why should high$-$beta assets have a higher expected return than low$-$beta assets?

Suppose you are deciding whether to invest $$100$ million in a steel mill. You know the expected cash flows for the project, but they are risky$-$steel prices could rise or fall in the future. How would the CAPM help you select a discount rate for an NPV calculation?

How does a consumer trade off current and future costs when selecting an air conditioner or other major appliance? How could this selection be aided by an NPV calculation?

What is meant by the "user cost" of producing an exhaustible resource? Why does price minus extraction cost rise at the rate of interest in a competitive market for an exhaustible resource?

What determines the supply of loanable funds? The demand for loanable funds? What might cause the supply or demand for loanable funds to shift? How would such a shift affect interest rates?