**Unformatted text preview: **If price of bond is $20…effective interest rate would be: 10% • Pays $20 for bond…in one year you get $22 You are buying “the right” to get $22 at some given point in time If price were $10, effective interest rate would be 120% If price were $18, you get $4 in interest, effective interest rate would be roughly 25% If the price were $22, effective interest rate would be 0% Price of bonds goes down, interest rates go up Take out loans, interest rate goes up What the FED can do: * buy bonds, money supply increases * fed enters bond market, increase in demand * intrest rate decreases...

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