Bond A pays $8,000 in 28 years. Bond B pays $8,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the$8,000 is the only payment the bondholder receives.)Suppose the interest rate is 5 percent.Using the rule of 70, the value of Bond A is approximatelyNow suppose the interest rate increases to 10 percent.Using the rule of 70, the value of Bond A is now approximatelyIThe value of a bondrate.and the value of Bond B is approximatelyand the value of Bond B is approximatelyComparing each bond's value at 5 percent versus 10 percent, Bond A's value decreases by awhen the interest rate increases, and bonds with a longer time to maturity arepercentage than Bond B's value.sensitive to changes in the interest

Using the rule of 70, we can estimate the present value of each bond at a 5% interest rate as…

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, and the value

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

Problem 3PA

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Question

Bond A pays $8,000 in 28 years. Bond B pays $8,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the
$8,000 is the only payment the bondholder receives.)
Suppose the interest rate is 5 percent.
Using the rule of 70, the value of Bond A is approximately
Now suppose the interest rate increases to 10 percent.
Using the rule of 70, the value of Bond A is now approximately
I
The value of a bond
rate.
and the value of Bond B is approximately
and the value of Bond B is approximately
Comparing each bond's value at 5 percent versus 10 percent, Bond A's value decreases by a
when the interest rate increases, and bonds with a longer time to maturity are
percentage than Bond B's value.
sensitive to changes in the interest

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