ECON 0280 PS 2 (Ball)

# ECON 0280 PS 2 (Ball) - long-term bonds or short-term bonds...

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ECON 0280: Introduction to Money and Banking Problem Set 2—Ball Chapter 3 (Please note that there is no problem set 1 from the ﬁrst lecture topic.) 1. Ball, Chapter 3, p. 80, question 4. 2. If the interest rate is 10%, what is the present value of a security that pays you \$1,100 next year, \$1,210 the year after and \$1,331 the year after that? 3. Write down the formula that is used to calculate the yield to matu- rity on a twenty-year 10% coupon bond with \$1,000 face value that currently sells for \$2,000 (you do not need to solve for i ). 4. If there is a decline in interest rates which would you rather be holding:
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Unformatted text preview: long-term bonds or short-term bonds? Why? Which type has the greater interest rate risk? 5. If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy a house? 6. Interest rates were lower in the mid-1980s than they were in the mid-1970s, yet many economists have commented that real interest rates were actually much higher in the mid-1980s than in the mid-1970s. Does this make sense? Why were these economists correct? 1...
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