Please help with a couple of macro econ quesitons... Consider a bond that promis

Question

Please help with a couple of macro econ quesitons...

Consider a bond that promises to pay $100 in one year. What is the interest rate on the bond if its price today is $75? $85? $95? What is the relation between the price of the bond and the interest rate? If the interest rate is 8%, what is the price of the bond today? Suppose that money demand is given by M^d = $ Y (.25 - i) where $Y is $100. Also, suppose that the supply of money is $20. What is the equilibrium interest rate? If the Federal Reserve Bank wants to increase i by 10 percentage points (e.g., from 2% to 12%), at what level should it set the supply of money?

Explanation / Answer

3) future value of bond is $100

a) as investment period is 1 year so for this specific case the formula can be intrest rate(in decimal) = FutureValue/Presentvalue - 1

b) we can see from above table that as price increases interest decreases

c) Present value = Future value/(1+r) = 100/1.08 = $92.59

Future Value Present value Interesst rate 100 75 0.333 100 85 0.176 100 95 0.053

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