Shaken not Shtirred Bond Markets 1. Consider an economy with one bank and one rm (called \"Firm A\") which employs all individuals in the economy. This bank has the following TAccount: Assets | Liabilities Reserves: $60B Deposits: $600B MortgageBacked Securities: $5003 Repos: $100B Corporate Bonds (Firm A): $2003 Bank Capital: $603 Firm A nances its operations using l-year corporate debt. They produce according to the following schedule: Interest Rate on Bonds Quantity Produced Labor Employed 0.05 110B 11M 0.045 120B 13M 0.04 150B 20M 0.035 200B 30M 0.03 250B 45M 0.025 400B 75M 0.02 600B 100M 0.015 650B 110M 0.01 700B 125M The good that they produce is always sold for $2 each. a (3 points) The bonds sold by Firm A are zerocoupon bonds and a face value of $1000. If the price of the bond is $975.61, what is the interest rate on this bond using the table above (round to nearest interest rate on the table)? At this interest rate, how much quantity does the rm produce? How much labor do they employ? b (2 points) The market for Firm A's corporate debt currently has the following supply and demand curves (note that quantities are in millions of units): P\" = 982 0.02495 x Q\" (1) P3 = 963 + 0.0492 x Q3 (2) Show that the equilibrium price in this market is P* = 975.61 by setting P3 = PD and Q" = 256.25M by setting Q3 = QD (note that quantities are in millions). c (1 points) Evil mastermind Auric Goldnger executes a plan to rob the bank and steals $15B worth of Corporate Bonds and $240B worth of mortgagebacked securities. How many bonds does the bank still have? Is the bank still solvent? d (4 points) The bank must liquidate its portfolio in order to repay its depositors and lenders. With the quantity of bonds you found in the previous part, what is the new equilibrium price and quantity in the market for bonds (note that equilibrium quantity will increase by the amount the bank must sell)? What is the new interest rate? What is the value of the bank's corporate bonds at this price? e (2 points) At the new interest rate (use 3% if you were unable to solve for the value in the previous part), how much does the rm's output decrease? How many workers lose their jobs at this new interest rate? f (2 points) James Bond inltrates Goldnger's secret compound, but is captured. Goldnger offers to return James Bond as well as the stolen bonds for $350B. While Goldnger is explaining his brilliant plan, Bond (the spy) escapes and is able to return all of the stolen bonds and mortgagedbacked securities. If James Bond hadn't been able to recovery the stolen assets, should the government have taken Goldnger's offer? Why or why not