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ECO 320LHW3
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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 Fall '08
 KURUSCU
 Macroeconomics

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