Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 7, Problem 1NP
To determine
To find: The interest rate on two year bond, three year bond and the shape of yield curve.
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Students have asked these similar questions
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…
Bond 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 interest
A zero-coupon bond is a bond that is sold for less than its face value (that is, it is
discounted) and has no periodic interest payments. Instead, the bond is
redeemed for its face value at maturity. Thus, in this sense, interest is paid at
maturity. Suppose that a zero-coupon bond sells for $8,500 and can be
redeemed in 20-years for its face value of $38,000. What is the annual
compound rate of return?
Annual compound rate =
% (Round to two decimal places as needed.)
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Similar questions
- 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_forwardThe 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 than $1,000 on September 24. The yield on a bond is a…arrow_forwardYou 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_forward
- Suppose a bond makes $150 coupon payments at the end of the next two years, at which time the face value of $1,000 is repaid. If the interest rate is 8 percent, then what is the present value of the bond? The present value (PV) of the bond is $1124.83. (Enter your response rounded to two decimal places.)arrow_forwardIf the interest rate is 20 percent, what is the present value of a bond that matures in two years, pays $85 one year from now, and pays $1,085 two years from now? The present value of the bond is $ (Enter your response rounded to the nearest cent.)arrow_forwardIf competing yields are expected to change to 12%, what is the current yield on this same bond assuming that you paid $500? The current yield is. (Round your response to the nearest integer.) If you sell this bond in exactly one year, having paid $500, and received exactly one coupon payment, what is your total return if competing yields are 12%? Your total return is %. (Round your response to two decimal places.)arrow_forward
- Suppose that the market interest rate in an economy is 7 percent and a bond promises to pay $615 after one year, $856 two years from now, and finally $1423 three years from now The equilibrium market price of this bond is $ (Round your response to two decimal places) If this bond were to sell for $2981 in the market, then it is profitable this bond from investors' perspectives.arrow_forwardThe table below shows interest rates on 10-year bonds for a sample of American countries (Source: Bloomberg, 08/2018). What factors explain why the rate for a 10-year bond is higher in Brazil and Mexico than US and Canada? 10-Year Government Bond Yields COUNTRY United States Canada Brazil Mexico YIELD 2.88% 2.30% 11.81% 7.77% A higher default risk for Brazil and Mexico and lower expected inflation in US and Canada. A lower default risk for Brazil and Mexico and lower expected inflation in US and Canada. A higher default risk for Brazil and Mexico and higher expected inflation in US and Canada. A lower default risk for Brazil and Mexico and higher expected inflation in US and Canada.arrow_forwardSuppose that the yield curve shows that the one-year bond yield is 3 percent, the two-year yield is 4 percent, and the three-year yield is 5 percent. Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the three-year bond is 2 percent. What are the expected one-year interest rates next year and the following year?arrow_forward
- The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, and two years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of £) as a function of the price of the bond is S = 2P+ 400. What is the equilibrium interest rate?arrow_forwardAnswer the question based on the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest yield = 10 percent. If the price of this bond increases to $2,500, the interest yield willarrow_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_forward
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