MATH IT GRAPH IT WRITE IT Economists argue that bond prices and interest rates a
ID: 2803212 • Letter: M
Question
MATH IT GRAPH IT WRITE IT Economists argue that bond prices and interest rates are inversely related. On a piece of notebook paper use the following scenario to answer the questions. The government offers a $1,000.00 bond, paying 10% interest, for a period of one year. Show all work. I. Please calculate the interest income for this bond. y: P r. 2. Please determine the price of the bond in the secondary market, if prevailing interest rates fell from 1096 to 9.5%. hint: remember, the bond face value, interest, and maturity date cannot change, so wh this bond purchaser remits the bond to the government, they will still be paid your response from num ber one) Create an idealized bond and money n 4. Starting from the original scenario, please calculate the price of this bond in the secondary market if the prevailing interest rate climbed from 10% to 10.5%. 5. Create an idealized bond and money market model to show this relationship. Describe the outcomes.Explanation / Answer
1) Interest Income = 1000 * 10% = 100 Dollars
2) The PV of the Bond at 9.5 % is calculated as:
PV = (1000 + 100 ) / 1.095 = 1004.57
Thus The value of the Bond in the secondary market when the Interest Rate falls to 9.5 % is 1004.57 Dollars. Clearly we can see that the Price of the Bond has increased as the interest rate falls.
3)
The PV of the Bond at 10.5 % is calculated as:
PV = (1000 + 100 ) / 1.105 = 995.47
Thus The value of the Bond in the secondary market when the Interest Rate rises to 10.5 % is 995.47 Dollars. Clearly we can see that the Price of the Bond has decreased as the interest rate rises.
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