q1

The real rate of interest in the Republic of Mariana is 5.50% per annum. Its annual inflation as measured by the Consumer price index is 3.50%. What is the nominal rate of interest in the economy?

q2

As an analyst studying the financial sector of the Republic of Mariana, you are now told that due to a recent surge in the supply of money from investments by foreign investors the inflation rate is expected to shoot up to 6%. If Fisher's theory of interest rates (which relates the nominal rate of return to the real rate of return) holds in the Republic what will be the impact on the nominal interest rate? Explain briefly. No calculations are required.

q3

The Government of Mariana wishes to encourage savings habits among its citizens. It plans to float a series of bonds in its endeavor to get its citizens to save. The first of these series of bonds (Series I, hereafter) carrying a face value of Marianian pound 1000 (MP, hereafter) was issued with an annual coupon of 8% payable quarterly, redeemable at par (i.e. face value paid off at maturity) and with a seven-year tenor (i.e. 7 years original maturity) of which, currently, five years remain to maturity. The bond currently trades in the secondary market at Rs.960.10, implying an annual yield to maturity of 9.00% (quoted as an APR with quarterly compounding) or a quarterly yield of 2.25%. The second series is currently open for subscription by investors. The second series is being issued on more attractive terms. It has a face value of MP 1000, a coupon of 8.40% payable quarterly, and a tenor (maturity) of five years. As an investor who wishes to own bonds would you subscribe to the new bonds or buy them from the secondary market? Explain with workings