b)Assume a 10-year, $1,000 parvalue bond with a 10 percent annual coupon if its required rate of return is 10 percent what is the value of the bond? i) What would be the value of the bond described in part b if, just after it had been issued, the expected inflation rate rose by 3 percentage points? Would we now have a discount or a premium bond? ii) What would happen to the bonds' value if inflation fell, by 3 %? Would we now have a premium or a discount bond?
b)Assume a 10-year, $1,000 parvalue bond with a 10 percent annual coupon if its required rate of return is 10 percent what is the value of the bond? i) What would be the value of the bond described in part b if, just after it had been issued, the expected inflation rate rose by 3 percentage points? Would we now have a discount or a premium bond? ii) What would happen to the bonds' value if inflation fell, by 3 %? Would we now have a premium or a discount bond?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 10P
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The prices of bonds show an inverse relationship with the interest rate as the price of the present bond will decrease with the wise in the interest rate from the general level and vice-versa. The risk structure of interest rate depends on the term or duration of the bond. The formula for calculating the price of the bond is shown below:
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