Question

The demand curve and supply curve for​ one-year discount bonds with a face value of ​$1 comma 040 are represented by the following​ equations:

Bd​: Price equals negative 0.7Quantityplus1 comma 120 Bs​: Price equals nothingQuantityplus680

The expected equilibrium quantity of bonds is nothing. ​(Round your response to the nearest whole​ number.) The expected equilibrium price of bonds is ​$ nothing. ​(Round your response to the nearest whole​ number.) The expected interest rate in this market is nothing​%. ​(Round your response to two decimal​ places.)

Answer 1

Bd: P = -0.7Q + 1,120

Bs: P = Q + 680

At equilibrium; Bs = Bd

=> Q + 680 = -0.7Q + 1120

=> Q + 0.7Q = 1120 - 680

=> 1.7Q = 440

=> Q = (440 / 1.7)

=> Q = 258.8

=> Q = 259

Expected equilibrium quantity of bond is 259

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P = Q + 680

=> P= 259 + 680

=> P = 939

The expected equilibrium price of bonds is $939.

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face value of bond is $1,040

Price of bond is $939.

Interest rate = (Face value - Price ) / price

=> interest rate = (1040 - 939) / 939

=> Interest rate = 10.76%

the expected interest rate is 10.76%

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