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Use financial calculator A $1,000 bond has a 8.5 percent coupon and matures after eleven years....

  1. Use financial calculator

  2. A $1,000 bond has a 8.5 percent coupon and matures after eleven years. If current interest rates are 10 percent, what should be the price of the bond? Assume that the bond pays interest annually. . Round your answer to the nearest dollar.

  3. $  

  4. If after four years interest rates are still 10 percent, what should be the price of the bond? . Assume that the bond pays interest annually. Round your answer to the nearest dollar.

    $  

  5. Even though interest rates did not change in a and b, why did the price of the bond change?

    The price of the bond with the longer term is -Select-lesshigher than the price of the bond with the shorter term as the investors will collect the -Select-smallerhigher interest payments and receive the principal within a longer period of time.

  6. Change the interest rate in a and b to 6 percent and rework your answers. Assume that the bond pays interest annually. Round your answers to the nearest dollar.

    Price of the bond (eleven years to maturity): $  
    Price of the bond (seven years to maturity): $  

    Even though the interest rate is 6 percent in both calculations, why are the bond prices different?

    The price of the bond with the longer term is -Select-less/ higher than the price of the bond with the shorter term as the investors will collect the -Select-smaller/ higher interest payments for a longer period of time

Solutions

Expert Solution

A $1,000 bond has a 8.5 percent coupon and matures after eleven years. If current interest rates are 10 percent, what should be the price of the bond? Assume that the bond pays interest annually. . Round your answer to the nearest dollar.

$902.57

If after four years interest rates are still 10 percent, what should be the price of the bond? . Assume that the bond pays interest annually. Round your answer to the nearest dollar.

$926.97

Even though interest rates did not change in a and b, why did the price of the bond change?

The price of the bond with the longer term is less than the price of the bond with the shorter term as the investors will collect the smaller interest payments and receive the principal within a longer period of time.

Change the interest rate in a and b to 6 percent and rework your answers. Assume that the bond pays interest annually. Round your answers to the nearest dollar.

Price of the bond (eleven years to maturity): $1197.17
Price of the bond (seven years to maturity): $1139.56

Even though the interest rate is 6 percent in both calculations, why are the bond prices different?

The price of the bond with the longer term is higher than the price of the bond with the shorter term as the investors will collect the higher interest payments for a longer period of time

jeff jeffy answered 1 year ago
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