Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 11.A, Problem 7P

(a)

To determine

Price of bond and the interest rate.

(b)

To determine

Price of bond and the time period.

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For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain! a).  a bond of the U.S. government or a bond of an East European government b).  a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040 c).  a bond from Coca-Cola or a bond from a software company you run in your garage d).  a bond issued by the federal government or a bond issued by New York State
Which of the following is TRUE for a coupon bond? 31 Select one: a. The yield is less than the coupon rate when the bond price is below the par value b. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate c. The yield to maturity is greater than the coupon rate when the bond price is above the par value. d. The price of a coupon bond and the yield to maturity are positively related.
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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