Suppose that there is a decrease in expected rate of


1. Suppose that there is a decrease in the expected rate of inflation. Using the loanable funds model, illustrate how this would affect the nominal rate of interest.

2. How much would you like to pay today for a special security, which will pay you $1,000 at the end of the fifth year and another S500 at the end of the seventh year, ifyou require 10% APR return rate on the security (assume semi-annual compounding)?

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Financial Management: Suppose that there is a decrease in expected rate of
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