Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 26, Problem 1PA
Subpart (a):
To determine
The interest rate of different bonds.
Subpart (b):
To determine
The interest rate of different bonds.
Subpart (c):
To determine
The interest rate of different bonds.
Subpart (d):
To determine
The interest rate of different bonds.
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For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain!
a). a bond of the U.S. government or a bond of an East European government
b). a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040
c). a bond from Coca-Cola or a bond from a software company you run in your garage
d). a bond issued by the federal government or a bond issued by New York State
For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain!
a bond of the U.S. government or a bond of an East European government
a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040
a bond from Coca-Cola or a bond from a software company you run in your garage
a bond issued by the federal government or a bond issued by New York State
2. Many workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person not want to hold stock in the company where he works?
3. Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y = 10,000; C = 6,000; T = 1,500; G = 1,700. The economists also estimate that the investment function is: I =3,300 –100r where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving,…
How to find the effective interest rate of a bond?
Chapter 26 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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Similar questions
- Fill in the blank with correct words and explain it in 2-3 sentences eacharrow_forwardSuppose a bond pays annual interest of $50. Compute the interest rate per year that a bondholder can earn for each face value in the following table. Face Value Interest Rate per Year (Dollars) 200 500 1,000 (Percentage) If the annual interest paid stays the same and the face value of the bond goes up, then the interest rate paid for the bond per yeararrow_forwardConsider that you were given a US savings bond that will pay $100 when it matures in ten years. What happens if the interest rate rises to the present value of this bond payment?Why happens if the interest rate rises to the present value of this bond payment? A. Increases in present value B. The current value is unaffected. C. A decrease in present valuearrow_forward
- Which of the following bonds pays only the principal amount to the bondholders at the maturity. a. Zero coupon bond b. Fixed rate bond c. Coupon bond d. Floating rate bondarrow_forwardAnswer in step by step with explanation. Don't use Ai and chatgptarrow_forwardSuppose that the city of New York issues bonds to raise money to pay for a new tunnel linking New Jersey and Manhattan. An investor named Susan buys one of the bonds on the same day that the city of New York pays a contractor for completing the first stage of construction. Is Susan making an economic or a financial investment? What about the city of New York?arrow_forward
- many people think that the interest rate on a bond tells them all they need to know about how well off they are as a result of owning it. Explain the statement.arrow_forwardBond A pays $8,000 in 20 years. Bond B pays $8,000 in 40 years. (To keep things simple, assume these are zero-coupon bonds, which means the $8,000 is the only payment the bondholder receives.) a. If the interest rate is 3.5 percent, what is the value of each bond today? Which bond is worth more? Why? (Hint: You can use a calculator, but the rule of 70 should make the calculation easy.) b. If the interest rate increases to 7 percent, what is the value of each bond? Which bond has a larger percentage change in value? c. Based on the example above, complete the two blanks in this sentence: "The value of a bond [rises/falls] when the interest rate increases, and bonds with a longer time to maturity are [more/less] sensitive to changes in the interest rate.arrow_forwardYou buy a bond that has an annual interest rate of 2 percent and a coupon of $4. What is the price of the bond?arrow_forward
- The table below shows Demand and Supply for loanable fund at given time. Real interest rate Quantity of loanable fund demanded (billion $) Quantity of loanable fund supplied (billion $) 0.01 1000 400 0.02 950 450 0.03 900 500 0.04 850 550 0.05 800 600 0.06 750 650 0.07 700 700 0.08 650 750 0.09 600 800 0.10 550 850 0.11 500 900 0.12 450 950 0.13 400 1000 0.14 350 1050 0.15 300 1100 Instructions: Using excel, find the equilibrium real interest rate and quantity of loanable fund. show the equilibrium on a graph. If this country experiences a recession business cycle phase that decreases the demand for loanable fund by $200 billion. Find the new equilibrium real interest rate and quantity of loanable fund. Show the shift on the graph. list Two factors that shift SLF rightward and two factors that shift DLF rightward What is the meaning of crowding out?…arrow_forwardWhat group of people benefits from a higher interest rate? Explain how they benefit.arrow_forwardWhat causes the yield on a discount bond to exceed the coupon rate on a bond?arrow_forward
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