ta equilibrium, the market price of a bond will be (a) the present value of h un
ID: 1113423 • Letter: T
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ta equilibrium, the market price of a bond will be (a) the present value of h unaffected by changes in the interest rate. ethe sum of the annual returns, compounded to their value at the end of the asset's the income stream it produces. useful life. d) positively related to its yield. the same as its face value. A rise in the market priee of a bond with a specified income stream (a) has no effect on the bond's yield. b) is equivalent to a reduction in the present value of the bond is equivalent to an increase in the bond's rate of return. d will not affect the present value of the bond. implies a decrease in the bond's yield. A bond promises to pay $1000 one year from now. At an interest rate of 8 percent, the bond's present value is S of the bond would be S (a) $926; $909 (c) $920; $900 (e) $556 $500 1. If the interest rate were 10 percent, the market value (b) $1000; $1000 (d) $1080;$1100 If the price of a bond is below the bond's present value, then (a) we expect the bond price to fall further. (b) the lack of demand causes the bond price to fall. (c) the abundance of demand causes the bond price to rise (d) the bond's present value falls (e) None of the above. 4. The present value of a bond that matures in two years and has a face value of $500, an annual coupon rate of 9 percent, and a yield of 11 percent is (a) $450.45. (c) $590 (e) $73.05 5. (b) $442.33. (d) $482.87 The Theory of Money Demand The amount of money balances everyone in the economy wishes to hold is called the demand for money. The opportunity cost of holding money balances is the interest rate that could have been carned if wealth had been held in bonds. The total demand for money balances holding has three components: the transactions demand, the precautionary demand, and the speculative demand. The iotal demand for money is negatively related to the interest rate and is positively related to the price level and real GDP. If the interest rate falls, the quantity of money demanded increases (and the demand for bonds falls). This is represented by a movement down the money demand curve. If GDP or the price level change, the money demand curve (Mp) shifts. The opportunity cost to firms and households of holding money balances is (a) zero, since all economic transactions require the use of money. (b) the forgone interest that could have been eaned on other assets. (c) low when interest rates are high (d) the purchasing power of that money balance. o zero, since the Bank of Canada pays no interest for holding commercial bank reserves. 277 MONEY,INTEREST RATES, AND ECONOMIC ACTIVITY CHAPTER 28:Explanation / Answer
The correct option is (a) The correct option is (e) because this will reduce the rate of return earned by the bond. 1000/(1+0.08) = 925.925 = 926, 1000/(1+.1)= 909. The correct option is (a) The correct option is (c) there is abundance of demand for such a bond because its value is expected to rise.
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