Intermediate Macroeconomics

Problem Set 4: The money market model and non-traditional monetary policy Question 1: Bond prices and interest rates (10 points) Consider a bond that promises to pay $100 in one year. a. What is the equilibrium interest rate on the bond if its price today is $85? $95? b. Explain why there is an inverse relationship between bond prices and interest rates. (Explain the economic logic, not only the mechanics of the formula). c. If the interest rate is 4%, what is the price of the bond today?