Asset Values and Interest Rates Let's think about three different assets: a

bond, a share of stock, and a house.

a$.$ What is the "fundamental value" of each of these assets based on$?$

i$.$Bond:

ii$.$Stock:

iii.House:

b$.$ What happens to the present discounted value of these assets when the

interest rate goes down?

c$.$ What is an asset bubble and why does it form? Is a bubble more likely to

form in the presence of low interest rates? Is a bubble more likely in some of

these assets than others?

d$.$If you are an investor who believes there is a bubble in these markets, what

would you do$?$ Does your action depend on whether you believe the bubble is

just forming or is about to pop?