I'm reading a text of Macroeconomics - Financial Markets as a chapter.

It has a line which states: "Suppose you hold two-year bonds. Because the price of a two year bond is $P, every dollar you put in two-year bonds buys you $1/$P bonds today."

I didn't understand this line. Could someone explain it?

  • 1
    That's a confusing statement, but it might just be a poorly worded statement of something obvious. Like if milk is selling for $4 per gallon, for every $1 that I spend on milk I get $1/$4 (i.e., 1/4) gallons. – Pete Becker Nov 12 '18 at 13:55

I think Pete nailed it in the comment, but for another concrete example:

Suppose the price of a two-year bond is $100 (par). If you spent $1 on this two-year bond (which you can't do), you'd get 1/100 of a bond.

Now use a number N instead of 1. If you spend $500 on two-year bonds, you'd get $500/$100 or 5 bonds. So if you spend $N, you'd get N/100 bonds.

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