ECN 334 assignment 1

# ECN 334 assignment 1 - short term PV \$1000 1 05 5 PV=\$783.53 • = short term PV \$1000 1 03 5 PV=\$862.61 • = long term PV \$1000 1 05 30

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Stephen DeSimone Ecn 334: Money and Banking Professor Lardaro Assignment 1 1. = /( + ) PV FV 1 r n In this equation PV is present value which we would like to maximize. FV represents face value which is the original amount paid for the bond. The r represents the rate of interest and n represents the number of years to maturity. So to answer the question of whether it is better to be holding short term or long term bonds when interest rates are expected to decline we need only solve the equation using two different n’s and r’s. When interest rates decline both bonds gain value but the long term bond gains far more present value than the short term bond so you are better off holding a long term bond if rates are expected to fall. = /( +.

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Unformatted text preview: ) short term PV \$1000 1 05 5 PV=\$783.53 • = /( +. ) short term PV \$1000 1 03 5 PV=\$862.61 • = /( +. ) long term PV \$1000 1 05 30 PV=\$231.38 • = /( +. ) long term PV \$1000 1 03 30 PV=\$411.99 2. If a new FED chair is appointed who believes in a slower growth rate of money then less money will be available to banks. This will cause an increase in interest rates and a decrease in the present value of bonds. 3. With a yield curve like this one it can be inferred that interest rates have been falling or are expected to fall and the bond market is expected to pick up for a time. We can also infer that long term bonds will do better. The fall toward the end that the fall in interest rates is believed to be temporary. •...
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## This note was uploaded on 05/04/2008 for the course ECN 334 taught by Professor Ladaro during the Spring '08 term at Rhode Island.

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ECN 334 assignment 1 - short term PV \$1000 1 05 5 PV=\$783.53 • = short term PV \$1000 1 03 5 PV=\$862.61 • = long term PV \$1000 1 05 30

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