EBK ECONOMICS TODAY
18th Edition
ISBN: 9780133920116
Author: Miller
Publisher: YUZU
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Question
Chapter 16, Problem 1P
To determine
(a)
Current
To determine
(b)
Current bond price when interest rate rises to 10%.
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Students have asked these similar questions
Raphael observes that at the current level of interest ratesthere is an excess supply of bonds, and therefore he anticipates an increase in the price of bonds. Is Raphael correct?
Let's denote the price of a nonmaturing bond (called a consol) as P. The equation that indicates this price is P, =-, where I is the annual net income the bond generates and r is the nominal market interest rate.
a. Suppose that a bond promises the holder $200 per year forever. The nominal market interest rate is 6 percent. Calculate the bond's current price: $ 3333. (Round your answer to the nearest whole dollar.)
b. Calculate the bond's price, if the market interest rate increases to 12 percent: $. (Round your answer to the nearest whole dollar.)
Bond A pays $8,000 in 20 years. Bond B pays $8,000
in 40 years. (To keep things simple, assume these are
zero-coupon bonds, which means the $8,000 is the
only payment the bondholder receives.)
a. If the interest rate is 3.5 percent, what is the value
of each bond today? Which bond is worth more?
Why? (Hint: You can use a calculator, but the rule
of 70 should make the calculation easy.)
b. If the interest rate increases to 7 percent, what is
the value of each bond? Which bond has a larger
percentage change in value?
c. Based on the example above, complete the two
blanks in this sentence: "The value of a bond
[rises/falls] when the interest rate increases, and
bonds with a longer time to maturity are
[more/less] sensitive to changes in the interest rate.
Chapter 16 Solutions
EBK ECONOMICS TODAY
Ch. 16.E - Prob. 1PCh. 16.E - Prob. 2PCh. 16.E - Prob. 3PCh. 16.E - Prob. 4PCh. 16 - Prob. 16.1LOCh. 16 - Prob. 16.2LOCh. 16 - Prob. 16.3LOCh. 16 - Prob. 16.4LOCh. 16 - Prob. 16.5LOCh. 16 - Prob. aFCT
Ch. 16 - Prob. bFCTCh. 16 - Prob. 1CTQCh. 16 - Prob. 2CTQCh. 16 - Prob. 1FCTCh. 16 - Prob. 2FCTCh. 16 - Prob. 1PCh. 16 - Prob. 2PCh. 16 - Prob. 3PCh. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Prob. 6PCh. 16 - Prob. 7PCh. 16 - Prob. 8PCh. 16 - Prob. 9PCh. 16 - Prob. 10PCh. 16 - Prob. 11PCh. 16 - Prob. 12PCh. 16 - Prob. 13PCh. 16 - Prob. 14PCh. 16 - Prob. 15PCh. 16 - Prob. 16PCh. 16 - Prob. 17P
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Similar questions
- Why does longer-term bonds fluctuate more when interest rate change, than does shorter-term bondsarrow_forwardSuppose that the market interest rate in an economy is 7 percent and a bond promises to pay $615 after one year, $856 two years from now, and finally $1423 three years from now The equilibrium market price of this bond is $ (Round your response to two decimal places) If this bond were to sell for $2981 in the market, then it is profitable this bond from investors' perspectives.arrow_forwardYou own a zero-coupon bond that will pay 10,000 in two years. The interest rate from 2021 to 2022 is 0.09 and the interest rate from 2022 to 2023 is 0.03. What is the current price of this bond? Please give your answer to two decimal places. (Hint: one must discount this bond twice: once from 2022 to 2021; and then again from 2021 to 2020.)arrow_forward
- Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800 a. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed below or the bond price at each of the interest yields shown Instructions: Enter your responses in the gray-shaded cells. For bond prices, round your answers to the nearest dollar For interest yields, enter your answer as a percentage rounded to one decimal place. Bond Price Interest Yield, % $8,000 8.9% $10,000 $11,000 62% b. What generalization can be drawn from the completed table? O Bond prices and interest rates are inversely related O There is insufficient data to make a generalization. O Bond prices and interest rates are directly related. O Bond prices and interest rates are not related.arrow_forwardHow 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.)arrow_forwardConsider a $1200 bond that makes $30 annual coupon payments. If the interest rate is 2 percent and the bond matures in two years, what is the bond's present value? Carefully follow all mathematical instructions. Round intermediate steps to four decimal places and your final answer to two decimal places.arrow_forward
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