252 Chapter 11 Math It Graph It Write It Bond Prices and Interest Question Economists argue that bond prices and interest rates are inversely related. On a piece of notebook paper, please use the following scenario to answer the questions. The government offers a $1,000.00 bond, paying 10% interest, for a period of one year. Show all work. a. Please calculate the interest income for this bond. b. Please determine the price of the bond in the secondary market, if prevailing interest rates fell from 10% to 9.5%. (hint: remember, the bond face value, interest, and maturity date cannot change, so when this bond purchaser remits the bond to the government, they will stillbe paid your response from num- ber one) C. Create an idealized bond and money market model to show this relationship. Describe the outcomes. d. Starting from the original scenario, please calculate the price of this bond in the secondary market if the prevailing interest rate climbed from 10% to 10.5%. е. Create an idealized bond and money market model to show the relationship from the scenario in (d). Describe the outcomes. Monetary Policy Action Question Please use the following data for Macroland to answer the questions. This economy at real full employment output is $70 billion. M = 10 billion V = 10 P = 2 Y = ? billion a. Please solve for Y. (This is the current level of real GDP) b. How much is current level of nominal GDP? C. How big is the gap in real terms? What type of gap is this economy experiencing? d. What type of monetary policy should the FRB adopt to close this gap? How much should the money supply change to close the gap? (other things being equal, hold V and P constant) e. Construct an idealized money market and show the change in money supply to close the gap. Next, construct an idealized AD/AS model showing the related change to close the gap. е.
252 Chapter 11 Math It Graph It Write It Bond Prices and Interest Question Economists argue that bond prices and interest rates are inversely related. On a piece of notebook paper, please use the following scenario to answer the questions. The government offers a $1,000.00 bond, paying 10% interest, for a period of one year. Show all work. a. Please calculate the interest income for this bond. b. Please determine the price of the bond in the secondary market, if prevailing interest rates fell from 10% to 9.5%. (hint: remember, the bond face value, interest, and maturity date cannot change, so when this bond purchaser remits the bond to the government, they will stillbe paid your response from num- ber one) C. Create an idealized bond and money market model to show this relationship. Describe the outcomes. d. Starting from the original scenario, please calculate the price of this bond in the secondary market if the prevailing interest rate climbed from 10% to 10.5%. е. Create an idealized bond and money market model to show the relationship from the scenario in (d). Describe the outcomes. Monetary Policy Action Question Please use the following data for Macroland to answer the questions. This economy at real full employment output is $70 billion. M = 10 billion V = 10 P = 2 Y = ? billion a. Please solve for Y. (This is the current level of real GDP) b. How much is current level of nominal GDP? C. How big is the gap in real terms? What type of gap is this economy experiencing? d. What type of monetary policy should the FRB adopt to close this gap? How much should the money supply change to close the gap? (other things being equal, hold V and P constant) e. Construct an idealized money market and show the change in money supply to close the gap. Next, construct an idealized AD/AS model showing the related change to close the gap. е.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:252 Chapter 11
Math It Graph It Write It
Bond Prices and Interest Question
Economists argue that bond prices and interest rates are inversely related. On a piece of notebook paper,
please use the following scenario to answer the questions. The government offers a $1,000.00 bond, paying
10% interest, for a period of one year. Show all work.
a.
Please calculate the interest income for this bond.
b. Please determine the price of the bond in the secondary market, if prevailing interest rates fell from
10% to 9.5%. (hint: remember, the bond face value, interest, and maturity date cannot change, so when
this bond purchaser remits the bond to the government, they will stillbe paid your response from num-
ber one)
C.
Create an idealized bond and money market model to show this relationship. Describe the outcomes.
d.
Starting from the original scenario, please calculate the price of this bond in the secondary market if the
prevailing interest rate climbed from 10% to 10.5%.
е.
Create an idealized bond and money market model to show the relationship from the scenario in (d).
Describe the outcomes.
Monetary Policy Action Question
Please use the following data for Macroland to answer the questions. This economy at real full employment
output is $70 billion.
M = 10 billion
V = 10
P = 2
Y = ? billion
a.
Please solve for Y. (This is the current level of real GDP)
b. How much is current level of nominal GDP?
C.
How big is the gap in real terms? What type of gap is this economy experiencing?
d. What type of monetary policy should the FRB adopt to close this gap? How much should the money
supply change to close the gap? (other things being equal, hold V and P constant)
e. Construct an idealized money market and show the change in money supply to close the gap. Next,
construct an idealized AD/AS model showing the related change to close the gap.
е.
Expert Solution
Step 1
Note: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and specify the other subparts (up to 3) you’d like answered.
The question is based on the concept of valuation of bonds and sensitivity of bond price towards change in interest rate. The price of a bond is calculated as the discounted value of interest income and maturity value.
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