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## Order the answer to: Treasury bills have a fixed face value (say, \$1,000) and

Custom Essays business-economics Order the answer to: Treasury bills have a fixed face value (say, \$1,000) and

# Order the answer to: Treasury bills have a fixed face value (say, \$1,000) and

Question Treasury bills have a fixed (say, \$1,000) and pay interest by selling at a discount. For example, if a one-year bill with a \$1,000 sells today for \$950, it will pay \$1,000 – \$950 = \$50 in interest over its life. The interest rate on the bill is therefore \$50/\$950 = 0.0526, or 5.26 percent. a. Suppose the price of the Treasury bill falls to \$925. What happens to the interest rate? b. Suppose, instead, that the price rises to \$975. What is the interest rate now? c. Now generalize this example. Let P be the price of the bill and r be the interest rate. Develop an algebraic formula expressing r in terms of P. Show that this formula illustrates the point made in the text: Higher bond prices mean lower interest rates. business-economics
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