9. To find the price of this bond, we need to find the present value of the bond’s cash flows. So, the price of the bond is: P = $92.50(PVIFA1.95%,32) + $5,000(PVIF1.95%,32) P = $4,881.80 10. The approximate relationship between nominal interest rates (R), real interest rates (r), and inflation (h) is: + R r h Approximate = .039 .021 r – Approximate =.0180, or 1.80% r The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + = (1 + + R) r)(1 h) (1 + .039) = (1 + + .021) r)(1 Exact = [(1 + .039) / (1 + .021)] 1 r – Exact = .0176, or 1.76% r 11. The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is: (1 + = (1 + + R) r)(1 h) = (1 + .024)(1 + .037) 1 R – = .0619, or 6.19% R 12. The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is: (1 + = (1 + + R) r)(1 h) = [(1 + .13) / (1 + .08)] 1 h – = .0463, or 4.63% h 13. The Fisher equation, shows the exact relationship between nominal interest rates, real interest rates, and inflation, is: (1 + = (1 + + R) r)(1 h) = [(1 + .116) / (1.053)] 1 r – = .0598, or 5.98% r
9. To find the price of this bond, we need to find the present value of the bond’s cash flows. So, the price of the bond is: P = $92.50(PVIFA1.95%,32) + $5,000(PVIF1.95%,32) P = $4,881.80 10. The approximate relationship between nominal interest rates (R), real interest rates (r), and inflation (h) is: R r + h Approximate r = .039 – .021 Approximate r =.0180, or 1.80% The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + R) = (1 + r)(1 + h) (1 + .039) = (1 + r)(1 + .021) Exact r = [(1 + .039) / (1 + .021)] – 1 Exact r = .0176, or 1.76% 11. The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is: (1 + R) = (1 + r)(1 + h) R = (1 + .024)(1 + .037) – 1 R = .0619, or 6.19% 12. The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is: (1 + R) = (1 + r)(1 + h) h = [(1 + .13) / (1 + .08)] – 1 h = .0463, or 4.63% 13. The Fisher equation, shows the exact relationship between nominal interest rates, real interest rates, and inflation, is: (1 + R) = (1 + r)(1 + h) r = [(1 + .116) / (1.053)] – 1 r = .0598, or 5.98%
CHAPTER-8.docx