ECO 320LHW3
Due October 31, 2007 Classtime
1. Problems 1, 8, and 9 from chapter 8.
2. Questions about asset pricing.
De
fi
nition: 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 bill 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 the
reduction in interest rate, what would be the rate of return from your investment?
(c) You are considering taking a 30year mortgage to buy a condo on 6th Street. You can a
ff
ord to pay $12000
per year at the end of each year as mortgage payment. If the annual interest rate is 6%, what would be
the maximum price you can pay for a condo? What if the interest rate was 3%? HINT: Use Excell or some
math program to calculate the sum of present values, otherwise it will take a lot of time.
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 Fall '08
 KURUSCU
 Macroeconomics, tax revenues, lifetime budget constraint

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