Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 27, Problem 3PA
Subpart (a)
To determine
Calculating the value of bonds.
Subpart (b)
To determine
Calculating the value of bonds.
Subpart (c)
To determine
To determine: Value of bonds.
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Erin 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.)
2
Consider a bond with a three-year remaining maturity.
A. If somehow the face value of the coupon is $10,000 and the annual payment is $500. If the yield to maturity is 6%, what would the price of this bond be?
b. Considering your response to question (a), is the coupon rate higher, lower, or the same as the yield to maturity? Why?
Chapter 27 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Why are bonds somewhat risky to buy, even though they make predetermined payments based on a fixed rate of interest?arrow_forward4arrow_forwardSuppose that interest rates are 6 percent in the economy and a safe bond promises to pay $3 per year in interest forever. What do you think the price of the bond will be? Why? Suppose that the economy, interest rates suddenly fall to 3 percent. What will happen to the price of the bond that pays $3 per year?arrow_forward
- Suppose a bond pays annual interest of $50. Compute the interest rate per year that a bondholder can earn for each face value in the following table. Face Value Interest Rate per Year (Dollars) 200 500 1,000 (Percentage) If the annual interest paid stays the same and the face value of the bond goes up, then the interest rate paid for the bond per yeararrow_forwardIf the interest rate is 20 percent, what is the present value of a bond that matures in two years, pays $85 one year from now, and pays $1,085 two years from now? The present value of the bond is $ (Enter your response rounded to the nearest cent.)arrow_forward10. The bond has a 30-year maturity, an 8% coupon, and sells at an initial yield to maturity of 8%. Because the coupon rate equals yield to maturity, the bond sells at par value, or $1,000. The modified duration of the bond at its initial yield is 11.26 years, and its convexity is 212.4. If the bond's yield increases from 8% to 10%, the bond price will fall to $811.46, a decline of 18.85%. a. How does the price change according to the duration rule? b. How does the price change according to the duration-with-convexity rule?arrow_forward
- Suppose that you purchase a 2 year coupon bond at the time it is issued for $1100. The face value of the bond is $1000, with annual coupon payments of $80. a. What is the bond’s “coupon rate”? b. What is the bond’s “current yield”? c. What is the bond’s (nominal) “yield to maturity”? d. If you hold the bond for 1 year and sell it for $1035 (after collecting the first coupon payment), what is your “holding period rate of return”? Please answer all part otherwise Dounvotearrow_forwardA bond that has a face value of $300 maturing in one year is available for purchase for $252 . What is the interest rate offered on the bond (rounded to the nearest whole percent), and if the price of the bond were to increase, how would the interest rate be affected?arrow_forwardSuppose a bond makes $150 coupon payments at the end of the next two years, at which time the face value of $1,000 is repaid. If the interest rate is 8 percent, then what is the present value of the bond? The present value (PV) of the bond is $1124.83. (Enter your response rounded to two decimal places.)arrow_forward
- can you solve it with formulas?please make your text readable.arrow_forwardConsider that you were given a US savings bond that will pay $100 when it matures in ten years. What happens if the interest rate rises to the present value of this bond payment?Why happens if the interest rate rises to the present value of this bond payment? A. Increases in present value B. The current value is unaffected. C. A decrease in present valuearrow_forwardA bond has a Macaulay duration of 10.00 and is priced to yield 8.0%. If interest rates go up so that the yield goes to 8.5%, what will be the percentage change in the price of the bond? Now, if the yield on this bond goes down to 7.5%, what will be the bond's percentage change in price? Comment on your findings. If interest rates go up to 8.5%, the percentage change in the price of the bond is nothing%. (Round to two decimal places.) If interest rates go down to 7.5%, the percentage change in the price of the bond is nothing%. (Round to two decimal places.) Comment on your findings. (Select the best answer below.) A. As interest rates decrease, the price of the bond decreases. As interest rates increase, the price of the bond increases. B. As interest rates increase or decrease, the price of the bond will always increase. C. As interest rates increase or decrease, the price of the bond remains the same. D. As interest rates…arrow_forward
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