If the equilibrium price in the bond market for a one-year discount bond is $950, then the equilibrium interest rate in the loanable funds market must be
A)5%.
B)5.26%.
C)50%.
D)10%.

Question

Quizplus · Accepted Answer

The equilibrium interest rate is the discount rate that makes the present value of the one-year discount bond equal to its equilibrium price of $950. Using the formula for the present value of a bond, we can solve for the interest rate:

Present value = Face value / (1 + r)

$950 = $1000 / (1 + r)

1 + r = $1000 / $950

1 + r = 1.0526

r = 0.0526 or 5.26%

Therefore, the equilibrium interest rate in the loanable funds market must be 5.26%.

If the Equilibrium Price in the Bond Market for a One-Year