Answer 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 rate = 10 percent. If the price of this bond falls by $200, the interest rate will Multiple Choice fall by 5 percentage points. rise by 2.5 percentage points. rise by 5 percentage points. fall by 2.5 percentage points.

Answer 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 rate = 10 percent. If the price of this bond falls by $200, the interest rate will Multiple Choice fall by 5 percentage points. rise by 2.5 percentage points. rise by 5 percentage points. fall by 2.5 percentage points.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantity demanded/supplied at this interest rate? What happens to the demand/supply of the bond as the interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain. e) There is a business cycle contraction, so both supply and demand shifts. After the shift, the new demand curve is given by: D = 4000 + X − 2P , whereas the new supply curve is S = 2P + 200. For which values of X will the interest increase/decrease? Which values of X are in line with empirical data?
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