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Unformatted text preview: Chapter 6 Solutions to Assigned Problems:
1. P= $100 = $97.24 (1 + 0.038) 9 / 12 $6 $100 + i = 24.71% 1+ i 1+ i 2. a. $85 = b. $100 = c. $115 = $7 $100 + i = 7% 1+ i 1+ i $8 $100 + i = -6.1% 1+ i 1+ i Option (a.) has the highest yield to maturity. 3. a. P = $4 = $80 0.05 $4 = $66.67 0.06 b. newP = P falls by 16.7%; i rises by 20% c. $4 $66.67 - $80 + = -11.7% $80 $80 12. a. The supply of bonds has increased, causing prices to fall.
S0 E0 P0 P1 E1 S1 b. People's wealth has increased, shifting demand to the right. Firms have more investment opportunities, which shifts supply to the right. If prices are rising, it must mean that the shift of demand is stronger than the shift of supply. Price of Bonds D Quantity of Bonds S0 S1 P1 P0 E1 E0 D1 c. The perceived riskiness of stocks has risen and investors have shifted their resources into low-risk Treasurys. Demand has shifted right, increasing prices and decreasing yields.
S d. Investors expect interest rates to fall (and prices to rise). This shifts demand to the right (see diagram for part c). e. If bonds are viewed as illiquid, demand shifts left, causing prices to fall and interest rates to rise.
S Price of Bonds
Price of Bonds Price of Bonds
Price of Bonds Quantity of Bonds D0 P1 P0 E0 E1 Increased Demand for Bonds D1 D0 Quantity of Bonds P0 P1 E1 E0 Decreased Demand for Bonds D0 D1 Quantity of Bonds ...
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This note was uploaded on 04/03/2008 for the course ECON 301 taught by Professor Hassan during the Spring '08 term at Rutgers.
- Spring '08