EC223 Chapter Notes - Chapter 5: Interest Rate, Zero-Coupon Bond, Expected Return

41 views3 pages

ultramarinebadger314

13 Apr 2016

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Bu223 chapter 5 behaviour of interest rates. Demand curve: shows the relationship between quantity demanded and price. Bond demand goes up when interest rate are increasing. Example: 1 year discount bond, with which has no coupon payments but pays the owner face value in a year. I = interest rate = yield to maturity. This formula shows that a particular value of the interest rate corresponds to each bond price. If the bond sells for , the interest rate and expected return is: ( - ) / = 0. 053 = 5. 3% = interest rate and rete. At a price of : ( - ) / = 11. 1% which means the rete of this bond is higher, so the quantity demanded of this bond will be greater. Supply curve: shows the relationship between quantity supplied and price. As a firm issuing bonds, if the interest rate is high, than it costs them more to issue bonds.

Related Questions

An MBA student has proposed the following demand equation for good Y. QdY = a + b PY + c M

where: QdY = quantity demanded of good Y in millions of tons per year PY = Price of good Y in dollars per ton M = Average consumer income in thousands of dollars

What sign should this student expect a, b, and c to have? Explain.

The regression output from the computer is as follows:

Dependent Variable:

QdY R-Square F-ratio p-value on F

Observations: 90 .4 12.84 0.015

Variable Parameter Estimate Standard Error T-ratio P-Value

Intercept 60.00 5468.32 3.12 0.0082

PY -1.00 0.65 -1.27 0.2145

M 0.02 3.29 5 .12 0.0121

This economist is confortable using parameter estimates that are statistically significant at the 10 percent level or better.

Does PY have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.

Does M have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.

What fraction of the total variation in the quantity demanded of good Y remains unexplained? What can the student do to increase the explanatory power of his demand equation? What other variables might he add to his demand equation?

What is the expected quantity demanded of good y when PY = 200 and M = 10,000?

If demand decreases and supply increases simultaneously then for sure a. Prices will increase b. Prices will decrease c. Quantities will increase d. Quantities will decrease e. None of the above

Which of the following will increase the demand for chicken? a. An increase in the price of red meats b. A decrease in the price of red meats c. An increase in the price of chicken d. A decrease in the price of chicken e. None of the above

skychinchilla148

An MBA student has proposed the following demand equation for good Y.

Q_d^Y = a + b P_Y + c M

where: Q_d^Y = quantity demanded of good Y in millions of tons per year

P_Y = Price of good Y in dollars per ton

M = Average consumer income in thousands of dollars

A) What sign should this student expect a, b, and c to have? Explain.

The regression output from the computer is as follows:

Dependent Variable: Q_d^Y R-Square F-ratio p-value on F

Observations: 90 .4 12.84 0.015

Variable Parameter Estimate Standard Error T-ratio P-Value

Intercept 200.00 5468.32 3.12 0.0082

P_Y -2.00 1.65 -1.66 0.1145

M 0.01 3.29 1.12 0.2831

This economist is confortable using parameter estimates that are statistically significant at the 10 percent level or better.

B) Does P_Y have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.

C) Does M have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.

D) What fraction of the total variation in the quantity demanded of good Y remains unexplained? What can the student do to increase the explanatory power of his demand equation? What other variables might he add to his demand equation?

E)What is the expected quantity demanded of good y when P_Y = 100 and M = 10,000?

Choose the correct answer from the brackets:

A)The demand for money is mainly influenced by three variables: r (the short-term interest rate), Y (real GDP), and P (the aggregate Price level). Suppose r rises, but Y and P are unchanged. What happens to the quantity of money demanded?

r is both the opportunity cost of holding money and the reward for holding bonds. Thus, an increase in r causes people to want to hold (more/less ) of their wealth in the form of money and ( more/less) in the form of bonds to take advantage of the higher interest rate.

Suppose real income (Y) rises while the quantity of money in the economy stays the same. What happens to money demand?

The supply of money does not automatically rise when the production of real goods and services (Y) rises. However, the collective demand for money by firms and households does rise. To get this money firms and households attempt to (buy more/ sell some of their /more /less bonds).

Thus, an increase in Y causes people to want to hold (buy more /sell some of their / more /less) of their wealth in the form of money and (buy more / sell some of their / more / less ) in the form of bonds.

C)Suppose the price level (P) rises, but Y and r are unchanged. What happens to money demand?

If Y is unchanged, people will want to buy the same amount of goods and services as before. However, since P is higher, they will need (more / less) money to do so.

Hence, an increase in P causes people to want to hold (more / less) of their wealth in the form of money and (more / less) in the form of bonds.

purplesardine140

EC223 Chapter Notes - Chapter 5: Interest Rate, Zero-Coupon Bond, Expected Return

Document Summary

Get access

Related Documents

EC223 Chapter Notes - Chapter 5: Money Supply, Opportunity Cost, Liquidity Preference

EC223 Chapter 5: EC223 Chapter 5 Notes.docx

EC223 Lecture Notes - Lecture 9: Air Canada, John Maynard Keynes, Business Cycle

Related Questions