Suppose the current interest rate on a one-year bond is 2% and the current interest rate on a two-year bond is 4%. The term premium on a two-year bond is 1%. According to the expectations hypothesis, what interest rate should we expect on a one-year bond next year? Answer as a percentage to one decimal place and do not include symbols (e.g. $, %, commas) in your answer. Answer:

The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. One-Year Bond Year Rate 1 2.00% 2 4.00% 3 5.00% 4 8.00% 5 11.00% Multiyear Bond Rate 2.00% 5.00% 7.00% 9.00% 10.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) 11 = 0% 21 = 131 = 55 141 = = % do do do do % % %

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected real interest rate now has what effect on your desired capital stock? Use relevant diagrams to answer. (Assume a closed economy unless stated otherwise)

Let's denote the price of a nonmaturing bond (called a consol) as P. The equation that indicates this price is P, =-, where I is the annual net income the bond generates and r is the nominal market interest rate. a. Suppose that a bond promises the holder $200 per year forever. The nominal market interest rate is 6 percent. Calculate the bond's current price: $ 3333. (Round your answer to the nearest whole dollar.) b. Calculate the bond's price, if the market interest rate increases to 12 percent: $. (Round your answer to the nearest whole dollar.)