Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 29, Problem 4TY
a)
To determine
The change in the rate of interest when the price of the treasury bill falls to $925.
b)
To determine
The change in the rate of interest when the price of the treasury bill rises to $925.
c)
To determine
Algebraic formula expressing r in terms of P.
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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?
An FI has purchased a $201 million cap of 8 percent at a premium of 0.70 percent of face value. A $201 million floor of 4.1 percent is
also available at a premium of .75 percent of face value.
a. If interest rates rise to 9 percent, what is the amount received by the FI? What are the net savings after deducting the premium?
b. If the Fl also purchases a floor, what are the net savings if interest rates rise to 10 percent? What are the net savings if interest rates
fall to 3.1 percent? (Negative amounts should be indicated by a minus sign.)
c. If, instead, the Fl sells (writes) the floor, what are the net savings if interest rates rise to 10 percent? What if they fall to 3.1 percent?
(Negative amounts should be indicated by a minus sign.)
a. Amount received
Net savings
b. Net savings if interest rates rise to 10 percent
Net savings if interest rates fall to 3.1 percent
c. Net savings if interest rates rise to 10 percent
Net savings if they fall to 3.1 percent
The table below shows the market for credit cards at various interest rates in millions of dollars. What is the equilibrium
interest rate?
Interest
Quantity of Financial Capital Supplied
Quantity of Financial Capital Demanded
Rate
(Lending) ($ millions)
(Borrowing) ($ millions)
9%
$200
$275
10.5%
$205
$255
12.0%
$210
$235
13.5%
$215
$215
15.0%
$220
$195
16.5%
$225
$175
Provide your answer below:
Chapter 29 Solutions
Economics: Principles & Policy
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