If the price of this bond decreases by $250 to $750, what will its effective interest rate be for the new buyer? If the price of this bond increases to $1200, what will its effective interest rate be for the new buyer? When bond prices go up from (a) to (b), interest rates go (up, down, nowhere). % because % because

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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4. We can define bond as a financial device through which a borrower (a firm or government) is
obligated to pay the principal and interest on a loan at specific dates in the future. Answer questions
relating to interest rates and bond prices using the following information: The price of a bond with
no expiration date is $1000 and its fixed annual interest payment is $50; bond annual rate of interest
is 5%.
(a) If the price of this bond decreases by $250 to $750, what will its effective interest rate be for the
new buyer? %, because
(b) If the price of this bond increases to $1200, what will its effective interest rate be for the new
buyer?
(c) When bond prices go up from (a) to (b), interest rates go (up, down, nowhere).
%, because
Transcribed Image Text:4. We can define bond as a financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at specific dates in the future. Answer questions relating to interest rates and bond prices using the following information: The price of a bond with no expiration date is $1000 and its fixed annual interest payment is $50; bond annual rate of interest is 5%. (a) If the price of this bond decreases by $250 to $750, what will its effective interest rate be for the new buyer? %, because (b) If the price of this bond increases to $1200, what will its effective interest rate be for the new buyer? (c) When bond prices go up from (a) to (b), interest rates go (up, down, nowhere). %, because
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