How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)

Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter17: Financial Markets
Section: Chapter Questions
Problem 38P: Suppose Ford Motor Company issues a five year bond with a face value of 5,000 that pays an annual...
icon
Related questions
Question

How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)

A
В
E
F
G
H
52
53 NOW ANSWER THE FOLLOWING NEW QUESTIONS:
54
55 e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a
56 sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be
57 called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it
58 anyway for purposes of this problem.)
59
60 Nominal market rate, r:
8%
61 Value of bond if it's not called:
62 Value of bond if it's called:
The bond would not be called unless r<coupon.
63
64 We can use the two valuation formulas to find values under different r's, in a 2-output data table, and then use an IF
65 statement to determine which value is appropriate:
66
67
Value of Bond If:
Actual value,
68
Not called
Called
considering
call likehood:
69
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
Rate, r
70
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
0%
71
2%
72
4%
$0,00
73
6%
$0,00
$0,00
$0,00
$0,00
$0,00
$0,00
74
8%
75
10%
76
12%
77
14%
78
16%
79
80
Transcribed Image Text:A В E F G H 52 53 NOW ANSWER THE FOLLOWING NEW QUESTIONS: 54 55 e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a 56 sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be 57 called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it 58 anyway for purposes of this problem.) 59 60 Nominal market rate, r: 8% 61 Value of bond if it's not called: 62 Value of bond if it's called: The bond would not be called unless r<coupon. 63 64 We can use the two valuation formulas to find values under different r's, in a 2-output data table, and then use an IF 65 statement to determine which value is appropriate: 66 67 Value of Bond If: Actual value, 68 Not called Called considering call likehood: 69 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 Rate, r 70 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 0% 71 2% 72 4% $0,00 73 6% $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 74 8% 75 10% 76 12% 77 14% 78 16% 79 80
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Cash Flow
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Principles of Economics 2e
Principles of Economics 2e
Economics
ISBN:
9781947172364
Author:
Steven A. Greenlaw; David Shapiro
Publisher:
OpenStax
Microeconomics A Contemporary Intro
Microeconomics A Contemporary Intro
Economics
ISBN:
9781285635101
Author:
MCEACHERN
Publisher:
Cengage
ECON MICRO
ECON MICRO
Economics
ISBN:
9781337000536
Author:
William A. McEachern
Publisher:
Cengage Learning
Economics:
Economics:
Economics
ISBN:
9781285859460
Author:
BOYES, William
Publisher:
Cengage Learning
Managerial Economics: Applications, Strategies an…
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning
Survey Of Economics
Survey Of Economics
Economics
ISBN:
9781337111522
Author:
Tucker, Irvin B.
Publisher:
Cengage,