MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Question
Chapter 16, Problem 3SQP
To determine
Interest rate of a bond per year.
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Students have asked these similar questions
Consider a $1200 bond that makes $30 annual coupon payments. If the interest rate is 2 percent and the bond matures in two years, what is the bond's present value?
Carefully follow all mathematical instructions. Round intermediate steps to four decimal places and your final answer to two decimal places.
Suppose a bond pays annual interest of $50. Compute the interest rate per year that a bondholder can earn for each face value in the following table.
Face Value Interest Rate per Year
(Dollars)
200
500
1,000
(Percentage)
If the annual interest paid stays the same and the face value of the bond goes up, then the interest rate paid for the bond per year
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.
Chapter 16 Solutions
MACROECONOMICS FOR TODAY
Ch. 16.3 - Prob. 1.1YTECh. 16.3 - Prob. 2.1YTECh. 16.3 - Prob. 2.2YTECh. 16.A - Prob. 1SQPCh. 16.A - Prob. 2SQPCh. 16.A - Prob. 3SQPCh. 16.A - Prob. 4SQPCh. 16.A - Prob. 1SQCh. 16.A - Prob. 2SQCh. 16.A - Prob. 3SQ
Ch. 16.A - Prob. 4SQCh. 16.A - Prob. 5SQCh. 16.A - Prob. 6SQCh. 16.A - Prob. 7SQCh. 16.A - Prob. 8SQCh. 16.A - Prob. 9SQCh. 16.A - Prob. 10SQCh. 16.A - Prob. 11SQCh. 16.A - Prob. 12SQCh. 16.A - Prob. 13SQCh. 16.A - Prob. 14SQCh. 16.A - Prob. 15SQCh. 16 - Prob. 1SQPCh. 16 - Prob. 2SQPCh. 16 - Prob. 3SQPCh. 16 - Prob. 4SQPCh. 16 - Prob. 5SQPCh. 16 - Prob. 6SQPCh. 16 - Prob. 7SQPCh. 16 - Prob. 8SQPCh. 16 - Prob. 9SQPCh. 16 - Prob. 10SQPCh. 16 - Prob. 11SQPCh. 16 - Prob. 12SQPCh. 16 - Prob. 1SQCh. 16 - Prob. 2SQCh. 16 - Prob. 3SQCh. 16 - Prob. 4SQCh. 16 - Prob. 5SQCh. 16 - Prob. 6SQCh. 16 - Prob. 7SQCh. 16 - Prob. 8SQCh. 16 - Prob. 9SQCh. 16 - Prob. 10SQCh. 16 - Prob. 11SQCh. 16 - Prob. 12SQCh. 16 - Prob. 13SQCh. 16 - Prob. 14SQCh. 16 - Prob. 15SQCh. 16 - Prob. 16SQCh. 16 - Prob. 17SQCh. 16 - Prob. 18SQCh. 16 - Prob. 19SQCh. 16 - Prob. 20SQ
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Similar questions
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- A bond that has a face value of $300 maturing in one year is available for purchase for $252 . What is the interest rate offered on the bond (rounded to the nearest whole percent), and if the price of the bond were to increase, how would the interest rate be affected?arrow_forwardHow would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)arrow_forwardWhich of the following situations represent investment or saving? Explain. Your family takes out a mortgage and buys a new house. You use your $200 paycheck to buy stock in AT&T. Your roommate earns $100 and deposits it in his account at a bank. You borrow $1,000 from a bank to buy a car to use in your pizza delivery business. For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain. A bond that repays the principal in year 2030 or a bond that repays the principal in year 2040. 2 . A bond from Coca-Cola or a bond from a software company you run in your garage.arrow_forward
- 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_forwardErin buys a bond that pays no coupon payments for $160. When the bond matures, she receives $200. Erin earned an interest rate of ____________ percent on this bond. (Enter your answer "as a percent, but without the percentage sign." If you think Erin earned 99.99 percent interest, enter only 99.99 in the blank.)arrow_forwardBond A pays $8,000 in 28 years. Bond B pays $8,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the $8,000 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 Now suppose the interest rate increases to 10 percent. Using the rule of 70, the value of Bond A is now approximately I The value of a bond rate. and the value of Bond B is 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 when the interest rate increases, and bonds with a longer time to maturity are percentage than Bond B's value. sensitive to changes in the interestarrow_forward
- 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 approximatelyarrow_forwardCalculate the bond yield rate (%) for a bond with an annual interest payment of $200 and a market price of $9,000.arrow_forwardSuppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800. Compute and enter in the spaces provided in the accompanying table either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown. What generalization can be drawn from the completed table?arrow_forward
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