PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 11, Problem 1RQ
To determine

Explain money.

Expert Solution & Answer
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Explanation of Solution

According to the trend, the principal amount of bond is $1,000, and the maturity period is 1 year, where if the current one-year interest rate is equal to the coupon rate in the financial market, then Person A will receive $1,000 for the bond. For instance, suppose the coupon rate and the current one-year rate both are 5% that is 50(5% of 1,000), then, the bond holder will receive total $1,050 (Prinicipal amount+coupon payment) after one year. 

If the coupon rate is greater than the current year interest rate, then the value of bond is higher than $1,000 today. For instance, if the coupon rate is 7% and the current year interest rate is 6%, then bond holder will receive $1,070 in one year,  where the worth of bond is $1,009 today (1,070/1.06). In the same way, if the coupon rate is less than the current interest rate, then the value of bond will be lesser than $1,000 today.

Economics Concept Introduction

Bond: A bond is a written and signed legal promise to repay a certain sum of money on a certain date.

Coupon rate: The coupon rate is the interest rate promised when a bond is issued.

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