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Class : Money and Banking 3320 A borrower and lender agree that the expected inflation rate for the next year is 3 percent. Based on

Class : Money and Banking 3320

A borrower and lender agree that the expected inflation rate for the next year is 3 percent.

Based on this, they enter into a loan agreement where the nominal interest rate to be charged

is 8 percent.

a. Find the ex ante real interest rate.

b. Find the ex post real interest rate if the inflation rate turns out to be 6%

c. Which party to the transaction gains when the inflation rate turns out to be 6%

d. Find the ex post real interest rate if the inflation rate turns out to be 12%

For the following problems use the numbers provided to write out the formula you would use to find the answer, but do not carry out the actual calculation.

For example, if I said find the value one year from now of $100 invested today at i = 5%,

the correct answer would be: 100 (1 + .05)

a. How much money would you need to start out with today to have $X in12 years ifi = 8.4% .

b. Find the present value of $500 received3 years from now ifi = .6%

c. Find the yield to maturity of a coupon bond selling for $390 that has annual coupon payments of $80, a face value of $100 and a maturity of four years.

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