1. just do the 16-2. 16-1. Lets denote the price of a nonmaturing bond (called a consol) as Pb. The equation that indicates this price is Pb I/r, where I is the annual net income the bond generates and r is the nominal market interest rate.

   a. Suppose that a bond promises the holder $500 per year forever. If the nominal market interest rate is 5 percent, what is the bonds current price?

   b. What happens to the bonds price if the market interest rate rises to 10 percent?

2. 16-2. Based on Problem 16-1, imagine that initially the market interest rate is 5 percent and at this inter- est rate you have decided to hold half of your financial wealth as bonds and half as holdings of non-interest-bearing money. You notice that the market interest rate is starting to rise, however, and you become convinced that it will ultimately rise to 10 percent.

   a. Inwhatdirectiondoyouexpectthevalueofyour bond holdings to go when the interest rate rises?

   b. If you wish to prevent the value of your finan- cial wealth from declining in the future, how should you adjust the way you split your wealth between bonds and money? What does this imply about the demand for money?