Question

The demand curve and supply curve for one-year T-bills (with a face value of $78) were estimated using the following equations

? ? : ? = −0.04? + 94

? ? : ? = 0.1? + 10

a) What is the expected quantity of T-bills in the market? [ 2 points]

b) What is the expected equilibrium price and quantity of T-bills in this market? [ 2 points]

c) Given your answer in (a and b), what is the expected interest rate in this market?

Answer 1

a) The demand equation and supply equation has been given for the bond market.

Bd = -0.04Q + 94
Bs = 0.1Q + 10

We will equate these two equations

0.1Q + 10 = -0.04Q + 94
0.14Q = 84
Q = 600

The equilibrium quantity in the market is 600

b) The equilibrium price can be calculated by plugging the quantity in the equation.

0.1Q + 10
(0.1 * 600) + 10 = 70

The equilibrium price is equal to $70.

c) The t-bills are issued with maturity of one year of less. In this question, the maturity is not mentioned but we will assume it one year for the explanation purpose.

Rate of Return = ((Face Value - Current Value) - 1) * 100

((78 / 70) - 1) = 0.1143 or 11.43%