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Unformatted text preview: ECO 320LHW3 Due October 23, 2008 Classtime 1. Problems 3, 4, and 8 from chapter 8. 2. 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 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 rates). What would be the price of the bond after the interest rate cut? If you sell this bond just after therates)....
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 Fall '08
 KURUSCU
 Macroeconomics, tax revenues

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