Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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
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