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11. Problem 11 Bond A pays $4,000 in 20 years. Bond B pays $4,000 in 10 years. (To keep things simple, assume these are zero-coupon bonds, which means the $4,000 is the only payment the bondholder receives.) Suppose the interest rate is 7 percent. Using the rule of 70, the value of Bond A is approximately ,and the value of Bond B is approximately Now suppose the interest rate increases to 14 percent. Using the rule of 70, the value of Bond A is now approximately v , and the value of Bond 8 is approximately Comparing each bond's value at 7 percent versus 14 percent, Bond A's value decreases by a percentage than Bond Bs value. The value of a bond when the interest rate increases, and bonds with a longer time to maturity are v sensitive to changes in the interest rate.

11. Problem 11 Bond A pays $4,000 in 20 years. Bond B pays $4,000 in 10 years. (To keep things simple, assume these are zero-coupon bonds, which means the $4,000 is the only payment the bondholder receives.) Suppose the interest rate is 7 percent. Using the rule of 70, the value of Bond A is approximately ,and the value of Bond B is approximately Now suppose the interest rate increases to 14 percent. Using the rule of 70, the value of Bond A is now approximately v , and the value of Bond 8 is approximately Comparing each bond's value at 7 percent versus 14 percent, Bond A's value decreases by a percentage than Bond Bs value. The value of a bond when the interest rate increases, and bonds with a longer time to maturity are v sensitive to changes in the interest rate.

Essentials of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter19: The Basic Tools Of Finance
Section: Chapter Questions
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11. Problem 11 Bond A pays $4,000 in 20 years. Bond B pays $4,000 in 10 years. (To keep things simple, assume these are zero-coupon bonds, which means the $4,000 is the only payment the bondholder receives.) Suppose the interest rate is 7 percent. Using the rule of 70, the value of Bond A is approximately and the value of Bond B is approxdmately Now suppose the interest rate increases to 14 percent. Using the rule of 70, the value of Bond A is now approximately and the value of Bond B is approximately Comparing each bond's value at 7 percent versus 14 percent, Bond A's value decreases by a percentage than Bond B's value The value of a bond when the interest rate increases, and bonds with a longer time to maturity are v sensitive to changes in the interest rate.
Transcribed Image Text:11. Problem 11 Bond A pays $4,000 in 20 years. Bond B pays $4,000 in 10 years. (To keep things simple, assume these are zero-coupon bonds, which means the $4,000 is the only payment the bondholder receives.) Suppose the interest rate is 7 percent. Using the rule of 70, the value of Bond A is approximately and the value of Bond B is approxdmately Now suppose the interest rate increases to 14 percent. Using the rule of 70, the value of Bond A is now approximately and the value of Bond B is approximately Comparing each bond's value at 7 percent versus 14 percent, Bond A's value decreases by a percentage than Bond B's value The value of a bond when the interest rate increases, and bonds with a longer time to maturity are v sensitive to changes in the interest rate.
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