Money, Banking, and International Finance- We computed 100.00
0.04 0.03
1
0 =$
$
=
r gD
P=
- First, you set D 1 = D 2 = 0. Second, you calculate the stock price as
20.00
0.10 0.053 1
2 =$
$
=
r gD
P=
. However, this is for Year 3. Then you discount the cash
flow back to Year 0, yielding
16.53
1 0.10
20.00
(^0) + 2 =$
$
P=^
Answers to Chapter 8 Questions
- Six factors are wealth, expected returns, expected inflation, risk, liquidity, and information
costs. - Four factors are expected profits, business taxes, expected inflation, and government
borrowing. - Demand for bonds decreases and shifts leftward. Thus, both the bond price and quantity
decrease. Furthermore, the bond interest rate should rise. - Supply for bonds decreases and shifts leftward. Thus, the bond price increases while
quantity decreases. Furthermore, the bond interest rate should fall. - Demand for bonds increases and shifts rightward. Thus, both the bond price and quantity
rise. Furthermore, the bond interest rate should decrease. - During a business cycle, both supply and demand for bonds increase and shift rightward.
During a recession, both the supply and demand for bonds decrease and shift leftward.
Quantity is determinate while bond prices, and thus bond interest rates are indeterminate. - Real interest rate is -5% while the approximation yields -10%, which causes a large error.
0. 90 1. 00 10 %
0. 90 1 1 1 1. 00 5 %
r+ r+ = +r + r- If investors, businesses, and government expect higher inflation, then the supply for bonds
increases while investors purchase fewer bonds because inflation erodes the value of their
investments. Businesses and government supply more bonds because they can repay the
bonds with cheaper dollars. Thus, the nominal interest rate rises. - Loanable funds and bond market are opposites of each other. Loanable funds indicate the
direction the money flows while the bond is the good. If investors buy a bond, they are