Money and Banking

Fall 2000

Answers to Practice Questions #1

 

  1. See book for definitions and description.

 

  1. interest rate is 25%

 

  1. maximum price people will pay for your bond is $7812.50

 

  1. No, you should sell it for $8333 since that is the bond’s present value if the interest rate is 20%.

 

  1. the rate on municipal bonds is 4.725%

 

  1. Investors will prefer municipal bonds provided that the interest rate on municipal bonds is greater than 4.99% ( or 4.9875%).

 

  1. a.  50 cents
    1. 33 cents
    2. 25 cents
    3. (1/170)(100) = 58.823 cents
    4. (nominal value/price index)(100) = real value