Suppose you received a gift of $2000 cash on your 21st birthday. Further suppose

Question

Suppose you received a gift of $2000 cash on your 21st birthday. Further suppose you used it to purchase a bond with no expiration date that pays annual interest of $100. a. What is the annual yield rate on your bond? hat will be the market price of your bond if the interest rate on newly issued bonds of similar risk rises to 6%? b. W Alternatively, what will be the market price of your bond if the interest rate on newly issued bonds of similar risk falls to 4%? c. d. Complete the following: "Bond prices and interest rates are _related-

Explanation / Answer

a) Annual yield = Annual interest/Present value

Annual yield = 100/2000 = 5%

b)

New interest rate = 6%

Market price = Annual payment / interest rate

Market price = 100/6% = $1666.67

c)

Market price = 100/4% = $2500

d)

Bond prices and interest rates are inversely related.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.