2. Suppose that real money demand is represented by the equation M"/P= 0.25×Y.Calculate the velocity of money.3. Consider a five year $1000 semiannual coupon bond with a 5% coupon rate. If thebond is current trading for a price of $957.35, what is the bond's yield to maturity? Ifthe bond's yield to maturity increase a little bit, what will the bond's price be?4. Suppose a 7-year, $1,000 bond with an 8% coupon rate and semianmual coupons istrading with a yield to maturity of 6.75%. Is this bond currently trading at a discount,at par, or at a premium? Explain. If the yield to maturity of the bond rises to 7%,what price will the bond trade for?5. Suppose that you want to take a loan and that your local bank wants to charge youan annual real interest rate equal to 3%. Assuming that the annualized expected rateof inflation over the life of the bond is 1%, determine the nominal interest rate thatthe bank will charge you. What happens if, over the life of the loan, actual inflation is0.5%?

"Since you have asked multiple questions, we will solve the first question for you. If you want any…

Answered: 2. Suppose that real money demand is…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 3PA

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2. In year 1, the yield on 1-year T-bills is 1%, and on 10-year T-bond is 5%. In year 2, 1-year yield becomes 1.5%, and 10-year yield becomes 8.5%. 1. In year 2, does the market expect future short-term interest rate to rise or fall, compared with year 1? Why? Explain carefully. 2. Has the probability of a recession risen or decreased?
4. Use a different graph for each one and clearly label the axis and the shifting of curves. Explain clearly (in words and on the graph) whether the price and yield to maturity increased or decreased.4. You buy a bond that pays annual interest payments of 8% of the bond’s face value of $1000.You initially pay $1050 for the bond. You receive an annual interest payment after one year, then sell the bond for $1010. What is your total rate of return on the investment, expressed as a percentage of the purchase price?
A. Assume the interest rate in the bank is 6%. Should Apple Incorporated spend $10,000,000 to build a Research and Development facility that will yield $20 million in ten years? B. You will need $100,000 in seven years to buy a new car. How much money do you need to deposit in the bank now in order to have $100,000 seven years from now if the interest rate is 7%?
10. The bond has a 30-year maturity, an 8% coupon, and sells at an initial yield to maturity of 8%. Because the coupon rate equals yield to maturity, the bond sells at par value, or $1,000. The modified duration of the bond at its initial yield is 11.26 years, and its convexity is 212.4. If the bond's yield increases from 8% to 10%, the bond price will fall to $811.46, a decline of 18.85%. a. How does the price change according to the duration rule? b. How does the price change according to the duration-with-convexity rule?
7. If a yield curve looks like the one shown in the figure below, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market's predictions for the inflation rate in the future? Yield to Maturity Term to Maturity
13. A bond is said to be trading at a premium when the current yield is greater than the YTM and when the coupon rate is greater than the current yield. Is this true or false? Why?
2. Assume a bond with the following characteristics: face value = $1000; maturity = 5 years; N yearly coupon payments = $100. a. If the current price of this bond is $850, state what the formula is to calculate the bond's yield to maturity and state the range of interest rates where the yield to maturity should fall b. If you purchased this bond at face value and held it for 1 year, when you resold it for $850, what is the bond's rate of return?
A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate, a 7 percent promised YTM, and 10 years to maturity. What is the bond's duration? If interest rates are expected to rise by one half of a percent, by how much would you expect the price to change using the modified duration equation? How much would you expect the price to change using convexity? You need to use the bond duration and convexity calculator to answer this question.
If a perpetuity bond has an interest payment of $60 and your required yield is 20%, the MOST you would be willing to pay for the bond is $: a. 300. b. 600. c. 120. d. 6,000. QUESTION 78 Which of these statements about cryptocurrency is the MOST accurate? a. Its role as a medium of exchange is very high. b. The U.S. government serves as a guarantor whenever a cryptocurrency is hacked. c. It does not serve as either a unit of account or as a store of value. d. The supply of cryptocurrency is not managed by any government agency in any country.
1. Nominal Interest Rates/Yield Curves Forecasters predict that the annual rate of inflation will continue to be 1.2% for the foreseeable future. The nominal interest rate of Treasury securities with different maturities is shown below: Maturity Nominal Rate of Return 2.2% 2.6% 3,2% 3.8% 4.5% 1 year 2 years 5 years 10 years 20 years a. Plot the yield curve using Excel b. What shape is the yield curve? What does it say about the future direction of interest rates under the expectations theory? c. Approximately what real interest rate do Treasury securities offer investors at each maturity? d. If the nominal rate of interest paid by every Treasury security above suddenly increased by 1.5%, without any change in inflationary expectations, what effect, if any, would it have on your answers to part c? Explain.
If interest rates decline, which would you rather beholding, long-term bonds or short-term bonds? Why?Which type of bond has the greater interest-rate risk?
Bond A pays $8,000 in 20 years. Bond B pays $8,000in 40 years. (To keep things simple, assume that theseare zero-coupon bonds, meaning the $8,000 is theonly payment the bondholder receives.)a. If the interest rate is 3.5 percent, what is the valueof each bond today? Which bond is worth more?Why? (Hint: You can use a calculator, but the ruleof 70 should make the calculation easy.)b. If the interest rate increases to 7 percent, what isthe value of each bond? Which bond has a largerpercentage change in value?c. Based on the example above, complete the twoblanks 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 interestrate.”

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