You buy a 10-year bond with a 3% coupon. The market interest rate is 2%. If the market interest rate now increases to 4%: You are happy because the yield is now higher than the coupon rate. You are not happy, because the price of your bond decreased. You are not happy, because the price of your bond increased, making it more

You buy a 10-year bond with a 3% coupon. The market interest rate is 2%. If the market interest rate now increases to 4%: You are happy because the yield is now higher than the coupon rate. You are not happy, because the price of your bond decreased. You are not happy, because the price of your bond increased, making it more

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter20: Monetary Policy

Section: Chapter Questions

Problem 3SQP

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The price of a bond with no expiration date is originally $1,000 and has a fixed annual interest payment of $150. If the price of the bond then falls by $200, what will be the interest rate yield to a new buyer of the bond? Multiple Choice 10 percent 15 percent 9.4 percent 12.5 percent 18.8 percent
(a) You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today? [1%] (b) In the next period however, the interest rate changes unexpectedly to i 0 . What is the new price of the bond? If the bond is sold at the beginning of that next period, what is the yield from the consol? Does the yield increase or decrease if i 0 > i? [4%] (c) Suppose alternatively that the market expects that the interest rate will change to i 0 after the initial period. What is the initial value of the consol, and what is the yield from selling it after one period? [5%]
You are offered to buy a 4 year coupon corporate bond at the beginning of its 7th month on its third year for $963.94. Its face value is $1000 and its coupon rate is 5.172% p.a. with a coupon paid at the end of each quarter. The government bond rate now is 6.9% Is $963.94 a good price for you to buy it or not? What is the fair price for the bond? What is the yield if buy at the price that you have been offered? If the government bond rate suddenly goes down to 4.7%, what will be the new fair value of the bond?
The interest rate for a bond is always equal to its yield to maturity True False
The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £)as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantity demanded/supplied at this interest rate? What happens to the demand/supply of the bond as the interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain. e) There is a business cycle contraction, so both supply and demand shifts. After the shift, the new demand curve is given by: D = 4000 + X − 2P , whereas the new supply curve is S = 2P + 200. For which values of X will the interest increase/decrease? Which values of X are in line with empirical data? Please show all the steps and equations used to get to the answers.
The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £)as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantity demanded/supplied at this interest rate? What happens to the demand/supply of the bond as the interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain. e) There is a business cycle contraction, so both supply and demand shifts. After the shift, the new demand curve is given by: D = 4000 + X − 2P , whereas the new supply curve is S = 2P + 200. For which values of X will the interest increase/decrease? Which values of X are in line with empirical data?
Consider that you were given a US savings bond that will pay $100 when it matures in ten years. What happens if the interest rate rises to the present value of this bond payment?Why happens if the interest rate rises to the present value of this bond payment? A. Increases in present value B. The current value is unaffected. C. A decrease in present value
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