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Question - A firm issues a 3 year annual paying bond with a face value of $100 and a fixed coupon rate of 10% for $98 at the beginning of year 1. The effective interest rate on this bond is imputed as the internal rate of return that equates the amount raised to the present value of the promised fixed payments.
a. Compute the effective interest rate on this bond.
b. Give the accounting entries for this bond over the bond's lifetime.
c. Provide an amortization table over the bond's lifetime.
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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