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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Question
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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Check out a sample textbook solutionStudents have asked these similar questions
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.
Chapter 11 Solutions
Principles of Economics (12th Edition)
Ch. 11.A - Prob. 1PCh. 11.A - Prob. 2PCh. 11.A - Prob. 3PCh. 11.A - Prob. 4PCh. 11.A - Prob. 5PCh. 11.A - Prob. 6PCh. 11.A - Prob. 7PCh. 11.A - Prob. 8PCh. 11.A - Prob. 9PCh. 11.A - Prob. 10P
Ch. 11.A - Prob. 11PCh. 11.A - Prob. 12PCh. 11 - Prob. 1.1PCh. 11 - Prob. 1.2PCh. 11 - Prob. 1.3PCh. 11 - Prob. 2.1PCh. 11 - Prob. 2.2PCh. 11 - Prob. 2.3PCh. 11 - Prob. 2.4PCh. 11 - Prob. 2.5PCh. 11 - Prob. 2.7PCh. 11 - Prob. 2.8PCh. 11 - Prob. 2.9PCh. 11 - Prob. 3.1PCh. 11 - Prob. 3.2PCh. 11 - Prob. 3.3PCh. 11 - Prob. 3.4PCh. 11 - Prob. 3.5PCh. 11 - Prob. 3.6P
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Similar questions
- If the price of a government bond (gilt) traded on the stock market rises above its nominal value, which of the following statement must be true? 1 -The bond's coupon falls below the yield 2 - The bond's coupon rises above the yield 3-the bond's yield rises above the coupon 4 - the bond's yield falls below the couponarrow_forwardErin buys a bond that pays no coupon payments for $160. When the bond matures, she receives $200. Erin earned an interest rate of ____________ percent on this bond. (Enter your answer "as a percent, but without the percentage sign." If you think Erin earned 99.99 percent interest, enter only 99.99 in the blank.)arrow_forwardPlease help. Question in imagearrow_forward
- 6arrow_forwardBond 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 interestarrow_forwardFill in the blank with correct words and explain it in 2-3 sentences eacharrow_forward
- Evaluate (discussing positives and negatives of) the effect of interest rates on consumer choices.arrow_forwardInvestment X offers to pay you $5,500 per year for nine years, whereas Investment Y offers to pay you $8,000 per year for five years. a. Calculate the present value for Investments X and Y if the discount rate is 5 percent. b. Calculate the present value for Investments X and Y if the discount rate is 15 percent.arrow_forwardFor each of the following pairs, which bond would you expect to pay a higher interest rate? Explain! a bond of the U.S. government or a bond of an East European government a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040 a bond from Coca-Cola or a bond from a software company you run in your garage a bond issued by the federal government or a bond issued by New York State 2. Many workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person not want to hold stock in the company where he works? 3. Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y = 10,000; C = 6,000; T = 1,500; G = 1,700. The economists also estimate that the investment function is: I =3,300 –100r where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving,…arrow_forward
- Consider a $1200 bond that makes $30 annual coupon payments. If the interest rate is 2 percent and the bond matures in two years, what is the bond's present value? Carefully follow all mathematical instructions. Round intermediate steps to four decimal places and your final answer to two decimal places.arrow_forwardWhich of the following is TRUE for a coupon bond? Select one: a. The yield to maturity is greater than the coupon rate when the bond price is above the par value. b. The price of a coupon bond and the yield to maturity are positively related. c. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate d. The yield is less than the coupon rate when the bond price is below the par valuearrow_forwardIn the summer of 2010, Congress passed a far-reaching financial reform bill to attempt to prevent another financial crisis like the one that happened in 2008-2009. We will consider two scenarios related to this bill. 18. In the first scenario, suppose that by requiring firms to comply with strict regulations, the bill increases the cost of investment. Draw a graph showing the consequences of this scenario on the market for loanable funds. What is the result? 19. Now consider the second scenario: Suppose that by requiring firms to comply with strict regulations, the bill increases confidence that savers have with the financial system, making them more likely to save their money there. Draw a graph showing the consequences of this scenario on the market for loanable funds. In this scenario, which curve shifts, and what are the results?arrow_forward
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