1. Monetary Policy Problem

Given: Face Value of a government bond is $1,000,000

Present value of that bond is $414,642.86

The bond matures in 20 years

_______________ 1. What is the current interest rate?

_________ _____ 2. Assume the Federal Reserve wishes to cool the economy to reduce inflation. They should buy or sell bonds, or take no action in the bond market?

______ ________ 3. Assume the Federal Reserve enters the bond market and takes drastic action. They sell bonds until the bond present value falls to $148,643. This would cause the interest rate to rise or fall?

_______________ 4. Give the new interest rate of the bond above.

5. This is a very long bond (20 years). As the years go by, and assuming the Federal Reserve takes no action, explain why the present value of the bond above will rise.