Question

In: Economics

1. You purchased an IBM bond with a face value of $10,000 and an interest rate...

1. You purchased an IBM bond with a face value of $10,000 and an interest rate of 10%. Suddenly, the market interest rate changes, which raises your bond price by $600.

What was the original price of the bond? (Compute this answer to two decimal places.)_____?

2.What is the new market interest rate? (Compute this answer to two decimal places.)______?

Solutions

Expert Solution

1. 110% = 10,000

    100% = 10,000 * (100% / 110%) = $9,090.91

The original price of the bond = $9,090.91

2. When the bond price increased by $600, the new bond price = $9,090.91 + $600 = $9,690.91

The new market interest rate = [(10,000 - 9,690.91) / 9,690.91] * 100 = 3.19%


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