11. Problem 11 Bond A pays $4,000 in 20 years. Bond B pays $4,000 in 10 years. (To keep things simple, assume these are zero-coupon bonds, which means the $4,000 is the only payment the bondholder receives.) Suppose the interest rate is 7 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 14 percent. Using the rule of 70, the value of Bond A is now approximately v , and the value of Bond 8 is approximately Comparing each bond's value at 7 percent versus 14 percent, Bond A's value decreases by a percentage than Bond Bs value. The value of a bond when the interest rate increases, and bonds with a longer time to maturity are v sensitive to changes in the interest rate.

11. Problem 11 Bond A pays $4,000 in 20 years. Bond B pays $4,000 in 10 years. (To keep things simple, assume these are zero-coupon bonds, which means the $4,000 is the only payment the bondholder receives.) Suppose the interest rate is 7 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 14 percent. Using the rule of 70, the value of Bond A is now approximately v , and the value of Bond 8 is approximately Comparing each bond's value at 7 percent versus 14 percent, Bond A's value decreases by a percentage than Bond Bs value. The value of a bond when the interest rate increases, and bonds with a longer time to maturity are v sensitive to changes in the interest rate.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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