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.

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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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.

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