8. The demand for one-year discount bonds with a $1000 face value is given by P1

Question

8. The demand for one-year discount bonds with a $1000 face value is given by P1000 2B, where Pis the bond price and B is the number of the bonds demanded. The supply of the bonds is given by P-700 + 3B. Find the equilibrium oo98,poas a. price of the bond P b. quantity B* of the bonds bought & sold; c. interest rate (yield to maturity) The Bank of Canada has decided to sell 10 more bonds with a $1000 face value at whatever price the market pays, in the market described in question 8 above. Find the equilibrium 9. a. price of the bond P*; b. quantity B* of the bonds bought& sold; c. interest rate (yield to maturity) i

Explanation / Answer

8) Equilibrium has demand and supply equal to each other

1000 - 2B = 700 + 3B

300 = 5B

B = 60

Price = 700 + 180 = 880.

Hence price of bond is $880 and number of bonds s 60. Yield to maturity is (1000 - 880)*100/1000 = 12%.

9) New supply is P = 700 + 3(B - 10) or P = 700 + 3B - 30

New price and quantity are 1000 - 2B = 700 + 3B - 30

B = 330/5 = 66 bonds and P = $868

TYM = (1000 - 868)*100/1000 = 32%.

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