Microeconomics (7th Edition)
Microeconomics (7th Edition)
7th Edition
ISBN: 9780134737508
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 8.A, Problem 11PA
To determine

Impact of increase in the inflation rate on bond price.

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How to find the effective interest rate of a bond?
Suppose that interest rates are 6 percent in the economy and a safe bond promises to pay $3 per year in interest forever. What do you think the price of the bond will be? Why?  Suppose that the economy, interest rates suddenly fall to 3 percent. What will happen to the price of the bond that pays $3 per year?
What might cause interest rates to be low one year and high the next?
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