Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
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Question
Chapter 4, Problem 3QAP
a.
To determine
To find:the bond that promises to pay $100 in one year if interest on bond is currently priced $75, $85, $95.
b.
To determine
To find: relationship between the price of the bond and interest rate.
c.
To determine
To find:when the interest rate is 8%, then what could be the price of the bond for today.
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Students have asked these similar questions
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?
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.
Imagine that a local water company issued $10,000 ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%. a. Given the change in interest rates, would you expect to pay more or less than $10,000 for the bond? b. Calculate what you would actually be willing to pay for this bond.
Chapter 4 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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Similar questions
- Imagine that a local water company issued a $10,000 ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%. Calculate what you would actually be willing to pay for this bond.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_forwarddiscuss the relationship between the coupon rate, the market rate of interest and the price of bond?arrow_forward
- You own a zero-coupon bond that will pay 10,000 in two years. The interest rate from 2021 to 2022 is 0.09 and the interest rate from 2022 to 2023 is 0.03. What is the current price of this bond? Please give your answer to two decimal places. (Hint: one must discount this bond twice: once from 2022 to 2021; and then again from 2021 to 2020.)arrow_forwardA 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_forwardSuppose 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 yeararrow_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_forwardA 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_forwardSuppose that Aaron, the owner of Jack Brown's Burger Bar, wants to open a new restaurant. To open the restaurant, he will need to raise $250,000. Suppose Aaron decides to sell one year bonds with a $10,000 face value. If the price of the bond is $8500, the interest rate on the bond is %. Give your answer to two decimal places..arrow_forward
- You hold a two-period bond that pays a coupon at the end of each period. The interest rate is expected to be for each of these periods. What is the price of the bond today?arrow_forwardIf the price of a government bond (gilt) traded on the stock market rises above its nominal value, which of the following statement must be true? 1 -The bond's coupon falls below the yield 2 - The bond's coupon rises above the yield 3-the bond's yield rises above the coupon 4 - the bond's yield falls below the couponarrow_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
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