Consider the following contract, where you agree to pay somebody $200 per year, each year, for five years, beginning one year from now. On the final year of repayment (the fifth year), you are also expected to pay an additional $400 on top of the $200, making your full payment in the fifth year equal to $600. Assume that the interest rate is equal to 8%. Round all answers to two decimal places. What is the Present Value (PV) of the total payments that you will need to make as part of this contract? Suppose that somebody offers you $1,000 today to sign this contract. Would signing this contract yield a positive totally Net Present Value for you? Suppose that you could buy these contracts from people. You could pay a certain amount of money, and in return, you would own this contract which would make these payments to you.

8. What would we expect the be the market price for these contracts under efficient financial markets?

Suppose finally that there is a large increase in the Government Budget Deficit due to an increase in Government Spending.

9. What would you expect to happen to long-term interest rates as a result of this increase in the Budget Deficit? Explain your answer using our INS figure from class.

10. How would this change in the interest rate affect the market price for these contracts? Explain your answer.