EBK ECONOMICS TODAY
EBK ECONOMICS TODAY
18th Edition
ISBN: 9780133920116
Author: Miller
Publisher: YUZU
Question
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Chapter 16, Problem 2P
To determine

(a)

Relationship between interest rate and bond price.

To determine

(b)

How money to be invested-Bonds or Money.

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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​…
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