Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 25, Problem 5.3P
Sub part (a):
To determine
What happens to the value of the old bond.
Sub part (b):
To determine
Why would
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Students have asked these similar questions
If you owned a small firm that had become somewhat established, but you needed a surge of financial capital to carry out a major expansion, would you prefer to raise the funds through borrowing or by issuing stock? Explain your choice.
Why is it important for people who own stocks and bonds to diversify their holdings? What type of financial institution makes diversification easier?
What is a bond?
A certificate representing a loan from an investor to a corporation or government entity that makes fixed payments for a set time and eventually pays back the loan in full.
A certificate of ownership in a corporation with the right to a percentage of the earnings.
A payment for an investor to a corporation for the rights to future profits.
A group of stocks sold together for a set price.
Chapter 25 Solutions
Principles of Economics (12th Edition)
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- 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…arrow_forwardUnderstanding 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…arrow_forwardWhich has a higher average return over time: stocks, bonds, or a savings account? Explain your answer.arrow_forward
- many people think that the interest rate on a bond tells them all they need to know about how well off they are as a result of owning it. Explain the statement.arrow_forwardWhat causes the yield on a discount bond to exceed the coupon rate on a bond?arrow_forwardHow do interest rates affect bond yield and bond prices.arrow_forward
- Suppose that interest rates are 6 percent in the economy and a safe bond promises to pay $3 per year in interest forever. What do you think the price of the bond will be? Why? Suppose that the economy, interest rates suddenly fall to 3 percent. What will happen to the price of the bond that pays $3 per year?arrow_forwardWhat happens to interest rates in the market when bond prices fluctuate a lotarrow_forwardInvestors must go for investments that are liquid to ensure availability of funds when needed. Is it true or false?arrow_forward
- Arjay plans to sell a bond that matures in one year and has a principal value of $1,000. Can he expect to receive $1,000 in the bond market for the bond? Explain.arrow_forwardWhy are bonds somewhat risky to buy, even though they make predetermined payments based on a fixed rate of interest?arrow_forwardOn the golf course, John was playing near a group of four golfers. One of the four golfers was a director of Company ABC. The director was telling the three other golfers in his group that his company made much higher profits in the past year than in the previous year. When John went back to the office after the golf game, he checked with his broker regarding the stock and found that, two weeks earlier, the company had made an announcement similar to what the director had told his friends. John went ahead to buy the stock and was very pleased that the stock earned him abnormal returns over the next month. (i) Discuss the type of information that John heard on the golf course. Appraise which one (1) of the three forms of market efficiency is most relevant to this situation. (ii) Analyse and discuss whether the above situation describes a violation of the efficient markets hypothesis.arrow_forward
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