2009-HW3 - ECO 320L-HW3 DUE OCT 16, 2009 Before the Class...

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ECO 320L-HW3 DUE OCT 16, 2009 Before the Class Note: Questions will be solved in the class. As a result, no HW’s will be accepted after the class starts. 1. Questions about asset pricing. Definition: The face value (also known as the par value) of a bond is the amount of money the bond will pay when the bond matures. (a) Consider a treasury bond that promises to pay $100 (i.e. $100 face value) one year from now. If the annual nominal interest rate is 6%, then what would be the price of this bond today? What would be to the price of this bond if the annual nominal interest rate decreases to 4%? What can you say about the relation between the interest rate and the price of a bond? (b) Consider a treasury bill that promises to pay $100 three years from now. What would be the price of the bond today if the annual nominal interest rate is 6%? Assume that you buy this bond today at this price. One year from today, the annual nominal interest rate goes down to 5% (say due to Fed’s cutting interest
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