Bond A pays $12,000 in 28 years. Bond B pays $12,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the $12,000 is the only payment the bondholder receives.) Suppose the interest rate is 5 percent. Using the rule of 70, the value of Bond A is approximately______ , and the value of Bond B is approximately______ . Now suppose the interest rate increases to 10 percent. Using the rule of 70, the value of Bond A is now approximately ____ , and the value of Bond B is approximately______ . Comparing each bond's value at 5 percent versus 10 percent, Bond A's value decreases by a______ percentage than Bond B's value. The value of a bond _______ when the interest rate increases, and bonds with a longer time to maturity are______ sensitive to changes in the interest rate.
Bond A pays $12,000 in 28 years. Bond B pays $12,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the $12,000 is the only payment the bondholder receives.) Suppose the interest rate is 5 percent. Using the rule of 70, the value of Bond A is approximately______ , and the value of Bond B is approximately______ . Now suppose the interest rate increases to 10 percent. Using the rule of 70, the value of Bond A is now approximately ____ , and the value of Bond B is approximately______ . Comparing each bond's value at 5 percent versus 10 percent, Bond A's value decreases by a______ percentage than Bond B's value. The value of a bond _______ when the interest rate increases, and bonds with a longer time to maturity are______ sensitive to changes in the interest rate.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Bond A pays $12,000 in 28 years. Bond B pays $12,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the $12,000 is the only payment the bondholder receives.)
Suppose the interest rate is 5 percent.
Using the rule of 70, the value of Bond A is approximately______ , and the value of Bond B is approximately______ .
Now suppose the interest rate increases to 10 percent.
Using the rule of 70, the value of Bond A is now approximately ____ , and the value of Bond B is approximately______ .
Comparing each bond's value at 5 percent versus 10 percent, Bond A's value decreases by a______ percentage than Bond B's value.
The value of a bond _______ when the interest rate increases, and bonds with a longer time to maturity are______ sensitive to changes in the interest rate.
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