Money and Banking
Fall 2000
Answers to Practice Questions #1
- See
book for definitions and description.
- interest
rate is 25%
- maximum
price people will pay for your bond is $7812.50
- No,
you should sell it for $8333 since that is the bond’s present value if the
interest rate is 20%.
- the
rate on municipal bonds is 4.725%
- Investors
will prefer municipal bonds provided that the interest rate on municipal
bonds is greater than 4.99% ( or 4.9875%).
- a. 50 cents
- 33
cents
- 25
cents
- (1/170)(100)
= 58.823 cents
- (nominal
value/price index)(100) = real value