The demand and supply for a one year discount bond with a face value of $1000...
The demand and supply for a one year discount bond with a face value of $1000 is given by Bd: P = -0.5Qd + 1250 and Bs: P = Qs - 250. What is the equilibrium price and quantity for this discount bond? What is the interest rate?
Homework Answers
At equilibrium,
-.5*Q + 1250 = Q - 250
1.5*Q = 1500
Q = 1500/1.5
Q = 1000
Price = -.5*1000 + 1250
Price = $750
So, equilibrium price is $750 and quantity is 1000.
Let, interest rate = R
750 = 1000/(1+R)
R = 1000/750 - 1
R = 33.33%
So, the interest rate is 33.33%
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