The Canadian Government has once again decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay $90 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is 5%. What should this consol bond sell for in the market? What if the interest rate should fall to 4%? Rise to 6%? Why does the price go up when interest rates fall? Why does the price go down when interest rates rise? If the current discount rate for Canadian government bonds is 5%, what should this bond sell for in the market?
The Canadian Government has once again decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay $90 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is 5%. What should this consol bond sell for in the market? What if the interest rate should fall to 4%? Rise to 6%? Why does the price go up when interest rates fall? Why does the price go down when interest rates rise? If the current discount rate for Canadian government bonds is 5%, what should this bond sell for in the market?
Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates
Section: Chapter Questions
Problem 14QA
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The Canadian Government has once again decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay
$90
in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is
5%.
What should this consol bond sell for in the market? What if the interest rate should fall to
4%?
Rise to
6%?
Why does the price go up when interest rates fall? Why does the price go down when interest rates rise?If the current discount rate for Canadian government bonds is
5%,
what should this bond sell for in the market?Expert Solution
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