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The demand curve and supply curve for one-year discount bonds with a face value of $1000 are as follows, respectively
The demand curve and supply curve for one-year discount bonds with a face value of $1000 are as follows, respectively.
Bd: P = 1200 - 0.5 Q
Bs: P = 400 + 0.3 Q
Where P = price and Q = quantity.
a. What is the expected equilibrium price and quantity of bonds in this market?
b. Given your answer to part (a), what is the expected interest rate in this market?
Expert Solution
Face value= 1000
Bd: P = 1200 - 0.5 Q
Bs: P = 400 + 0.3 Q
a.)
Bd= Bs (the equilibrium in the bonds market will occur at the intersection of supply and demand for bonds;)
1200 - 0.5 Q= 400 + 0.3 Q
-0.5Q- 0.3Q= 400- 1200
-0.8Q= -800
Q= 800/ 0.8
= 1000
P= 1200 - 0.5 Q
= 1200- 0.5* 1000
= 1200- 500
= 700
b.)
Expected interest rate is as follows;
i= (F- P)/ P
= (1000- 700)/ 700
= 300/ 700
= 0.4285 or 42.9%
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