8. The relationship between bonds prices and the market interest rate Aa Aa Cons

Question

8. The relationship between bonds prices and the market interest rate Aa Aa Consider three bonds that have the same principal value of V-$1,000 and a coupon interest rate of-8%, but one matures at 5 years, another at 7 years, and the third at 10 years. Complete the following table by calculating the present value and the percentage change in the present value for each maturity when the market interest rate decreases to-6% and when increases to i-10%. (Hint: in case the percentage change in present value is negative, do not forget to enter the negative sign.) Time to Maturity Present Value of a $1000 Bond when i-6% Percentage Change in Present Value Percentage Present Value of a $1000 Bond when 1-10% Change in Present value (96) 5 year year 10 year Consider the relationship between the bond price (the vertical axis) and the market interest rate (the horizontal axis) presented on the folowing graph. The graph shows the three bonds with maturities at 5, 7, and 10 years BOND PRICE 1Dcltars 430 1200 1216 20 MARKET INTEREST RATE Percent in the following table identity each curve by its most probable maturity Curve Maturity

Explanation / Answer

when the market interest rate changes to 6%, the value of:

when the market interest rate changes to 10%, the value of:

pv @8% pv @6% %change in pv pv@10% %change in pv

5years bond 1000 1084 8.4 924 -7.6

7years bond 1000 1112 11.2 902 -9.8

10years bond 1000 1147 14.7 877 -12.3

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

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