EBK ECONOMICS TODAY
18th Edition
ISBN: 9780133920116
Author: Miller
Publisher: YUZU
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Question
Chapter 16, Problem 2P
To determine
(a)
Relationship between interest rate and
To determine
(b)
How money to be invested-Bonds or Money.
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Students have asked these similar questions
The remarkable thing about the events described in the article is that the yield on the 3-month T-bill was briefly negative. To see how this could
happen, consider the relationship between bond prices and bond yields.
A 3-month T-bill with a maturity value of $1,000 is just a piece of paper that entitles the holder to $1,000 in three months. For example, if you were
to buy a 3-month T-bill on September 24, 2008, with a maturity value of $1,000 and 90 days left to maturity, the U.S. government would pay you
$1,000 on December 23, 2008.
In general, the price of a bond is less than its maturity value. That is, if you are going to give up a certain amount of money for the duration of the
bond, you expect to be paid for this loss of liquidity and compensated for inflation that could reduce the value of the repayment at the end of the
period. Therefore, a piece of paper entitling you to $1,000 on December 23 would usually be worth less than $1,000 on September 24. The yield on a
bond is a…
Understanding the price of bonds and interest rates.
The remarkable thing about the events described in the article is that the yield on the 3-month T-bill was briefly negative. To see how this
could happen, consider the relationship between bond prices and bond yields.
A 3-month T-bill with a maturity value of $1,000 is just a piece of paper that entitles the holder to $1,000 in three months. For example, if you
were to buy a 3-month T-bill on September 24, 2008, with a maturity value of $1,000 and 90 days left to maturity, the U.S. government would
pay you $1,000 on December 23, 2008.
In general, the price of a bond is less than its maturity value. That is, if you are going to give up a certain amount of money for the duration of
the bond, you expect to be paid for this loss of liquidity and compensated for inflation that could reduce the value of the repayment at the
end of the period. Therefore, a piece of paper entitling you to $1,000 on December 23 would usually be worth less…
A bond has a Macaulay duration of
10.00
and is priced to yield
8.0%.
If interest rates go up so that the yield goes to
8.5%,
what will be the percentage change in the price of the bond? Now, if the yield on this bond goes down to
7.5%,
what will be the bond's percentage change in price? Comment on your findings.
If interest rates go up to
8.5%,
the percentage change in the price of the bond is
nothing%.
(Round to two decimal places.)
If interest rates go down to
7.5%,
the percentage change in the price of the bond is
nothing%.
(Round to two decimal places.)
Comment on your findings. (Select the best answer below.)
A.
As interest rates decrease, the price of the bond decreases. As interest rates increase, the price of the bond increases.
B.
As interest rates increase or decrease, the price of the bond will always increase.
C.
As interest rates increase or decrease, the price of the bond remains the same.
D.
As interest rates…
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
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- 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.arrow_forwardThe table below shows interest rates on 10-year bonds for a sample of American countries (Source: Bloomberg, 08/2018). What factors explain why the rate for a 10-year bond is higher in Brazil and Mexico than US and Canada? 10-Year Government Bond Yields COUNTRY United States Canada Brazil Mexico YIELD 2.88% 2.30% 11.81% 7.77% A higher default risk for Brazil and Mexico and lower expected inflation in US and Canada. A lower default risk for Brazil and Mexico and lower expected inflation in US and Canada. A higher default risk for Brazil and Mexico and higher expected inflation in US and Canada. A lower default risk for Brazil and Mexico and higher expected inflation in US and Canada.arrow_forward
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