ECON 301 HW - Patrick Hill ECO 301 Dr. Sungu 30 April 2011...

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Patrick Hill ECO 301 Dr. Sungu 30 April 2011 Homework Assignment #1 1. C=coupon payment, F=face value, i=yield to maturity, n=# of periods, PV = Present Value C=1000*.1=100, F=1000, n=20, PV=2000 thus… i= 3.171% 2. The yield to maturity is lower than 12% because the fixed loan payment is for only 23 years. The yield to maturity is lower because there are less periods to pay the principal back. 3. If both bonds are equal in face value and risk then the U.S. Treasury is a better deal because with a 9% yield maturity it will lower the present value. The yield to maturity is the rate of return the bond will earn over the course of its life. Thus there is a greater profit on U.S. Treasury bond over the U.S. T-Bill. 4. Bond Market Money Market Price/i-rates S0 i-rates S1 S0 S1 D D Quantity Quantity With an open market purchase, the money supply decreases thus driving up interest rates. This also increases the supply of bonds in the market thus lowering the price of bonds and raising the interest rates. The raising of the interest rate is consistent in both models
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ECON 301 HW - Patrick Hill ECO 301 Dr. Sungu 30 April 2011...

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