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Phyllis Jones Week 3 ECO320 10/28/12

Chapter 5 question 16

In table 5.5, show the derivation of each of the following entries:

a. the interest rate of 5.1 percent on a bond sold in 2011 that matures in 7 years.

2011: 5.0 2012: 5.5 2013: 6.0 2014: 6.0 2015: 5.8 2016: 5.5 2017: 5.1

b. The interest rate of 4.4 ...view middle of the document...

5 2016: 5.0 2017: 4.5 2018: 4.4

c. The interest rate of 4.5 percent on a bond sold in 2018 that matures in 2 years.

2018: 4.0 2019: 4.5

Chapter 6 question 13 Suppose that the Fisher hypothesis holds for an economy that has an expected real interest rate of 2%. For each of the expected inflation rates of 0, 2,4,6,8 percent, calculate the nominal interest rate and the after tax expected real interest rate if the tax rate is 30%

a.(0) 1000 principal x 0.00 nominal interest rate =0 interest earned b.(2) 1000 principal x0.02=$20 nominal interest rate. $20 x0.30= $6 taxes. $20-$6 taxes =$14 after –tax nominal interest income c(4). 1000 principal x0.04=$40 nominal interest. $40 x 0.30=$12. $40-$12=$28 after tax nominal interest income. D(6) $60 is nominal interest. $60 x0.30=$18. $60-$18=$42 after tax nominal interest income. E(8) $80 is nominal interest. $80 x0.30=$24. $80-$24=$56 after-tax nominal interest income.

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