Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800a. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of thebond prices listed below or the bond price at each of the interest yields shownInstructions: Enter your responses in the gray-shaded cells. For bond prices, round your answers to the nearest dollar For interestyields, enter your answer as a percentage rounded to one decimal place.Bond PriceInterest Yield, %$8,0008.9%$10,000$11,00062%b. What generalization can be drawn from the completed table?O Bond prices and interest rates are inversely relatedO There is insufficient data to make a generalization.O Bond prices and interest rates are directly related.O Bond prices and interest rates are not related.

Bond price can be calculated by using the following formula.

Answered: Suppose a bond with no expiration date…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Similar questions

1) If a $2,000 one-year bond pays $170 in annual interest, the interest rate on this bond is (do NOT use decimal)? 2) If the interest rate changes to 19.5%, the bond price will be? 3) If the interest rate changes to 16.5%, bond price will be?
Suppose as a hypothetical scenario that you deposit $400 today into a savings account with a variable interest rate and will collect a payment in one year. True or False: If over the course of the year the interest rate falls, this increases the future value of your investment. True False
1
Suppose you observe that short-term interest rates are higher than long-term interest rates. a. What expectations must people have regarding future interest rates? b. Why might the above relationship signal a recession? Why might it not? c. What will the yield curve for this problem look like? Q4 Why is the fact that stock prices follow a random walk a signal of stock market efficiency? What would have to be true if stock prices did not follow a random walk?
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
26
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?
Suppose a new process was developed that could be used to make oil out of seawater. The equipment required is quite expensive, but it would in time lead to low prices for gasoline, electricity, and other types of energy. What effect would this have on interest rates? (Hint: which direction does demand curve shift? How does it change savings and investment in the economy?)
E3 The demand curve and supply curve for one-year discount bonds were estimated using the following equations: Bd Price=-2/5Quantity+990 Bs Price=Quantity+500 As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a result, the new market interest rate increased to 19.65%, but the equilibrium quantity remained unchanged. What are the new demand and supply equations? Assume parallel shifts in the equations
Suppose the value of a new financial security increases with time, such that one dollar of the financial currency at year 0 is worth V(t) = exp{2/t-0.15f} dollars at time t. If the interest rate is 10 percent, after how many years should the financial asset be sold in order to maximize the PDV of the sale? (NOTE: Write your answer in number format, with 2 decimal places of precision level; do not write your answer as a fraction. Add a leading zero and trailing zeros when needed. Use a period for the decimal separator and a comma to separate groups of thousands.)
Calculate the future value of $500 four years from now based on the following scenarios. Instructions: Enter your answers rounded to 2 decimal places. a. What is the future value of $500 four years from now if the interest rate is 5 percent? %24 b. Suppose that the interest rate is 7 percent. What is the future value of the payment four years from now?

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