DISCUSSION QUESTIONS

1. Why is interest paid by borrowers to lenders?

2. To what extent do you feel that consumers will save more if the interest rate is higher (positive supply elasticity)?

3. What factors determine the discount rate that one should use in valuing future sums?

4. A zero coupon bond makes no interim payments, returning only a single lump sum in the future. Would you treat this as an annuity? Explain.

5. If a borrower chooses a 15 year mortgage rather than a 30 year mortgage, the payments are not doubled, in fact they often increase by less than a quarter. Why is this so?

6. What is the importance of duration in estimating an appropriate discount rate?