4. Suppose that an investment institution offers youtwo kinds of bonds and you are willing to take oneof them. The first bond, called 'Bond A1' pays you$5000 in 10 years, while the second bond, called'Bond B1' pays you the same amount but in 20years.а.If the interest rate is 5%, what is the value ofeach bond today? Which bond is worth more?Why?b. If the interest rate increases to 8%, what is thevalue of each bond? Which bond has a largerpercentage change in value?After knowing the answer of A and B, you willС.be able to complete this sentence: "The value ofbond [rises / falls] when the interest rateincreases, and bonds with longer time tomaturity are [more/less] sensitive to changes inthe interest rate"

Present worth of a bond means the present value of all the future payments which are going to be…

Suppose that an investment institution offers you two kinds of bonds and you are willing to take one of them. The first bond, called 'Bond A1' pays you $5000 in 10 years, while the second bond, called 'Bond B1' pays you the same amount but in 20 years.

Suppose that an investment institution offers you two kinds of bonds and you are willing to take one of them. The first bond, called 'Bond A1' pays you $5000 in 10 years, while the second bond, called 'Bond B1' pays you the same amount but in 20 years.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 11P

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

4. Suppose that an investment institution offers you
two kinds of bonds and you are willing to take one
of them. The first bond, called 'Bond A1' pays you
$5000 in 10 years, while the second bond, called
'Bond B1' pays you the same amount but in 20
years.
а.
If the interest rate is 5%, what is the value of
each bond today? Which bond is worth more?
Why?
b. If the interest rate increases to 8%, what is the
value of each bond? Which bond has a larger
percentage change in value?
After knowing the answer of A and B, you will
С.
be able to complete this sentence: "The value of
bond [rises / falls] when the interest rate
increases, and bonds with longer time to
maturity are [more/less] sensitive to changes in
the interest rate"

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Part a

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