Question

Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $950. Compute and enter in the spaces provided in the table below either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown.

Instructions: For bond prices, round to the nearest dollar. For interest rate, round your answer up to two decimal places.

Bond Price	Interest rate(s) %
$ 8,500
$	10
$10,500
$11,500
$	7.04

What generalization can be drawn from the completed table?

a) Bond price and interest rate are inversely related.  

b) There is insufficient data to make a generalization.  

c) Bond price and interest rate are not related.

d) Bond price and interest rate are directly related.

Answer 1

Following table is completed using the equations given below, generalized equation for a perpetual bond is :

Bond Price	Interest rate(s) %
$ 8,500
	10
$10,500
$11,500
	7.04

If we arrange the numbers in ascending order of price we get the following table:

Price	Interest
8500	11.18%
9500	10.00%
10500	9.05%
11500	8.26%
13494.32	7.04%

Above table implies that the Bond price and interest rate are inversely related, this is also implied by the equation used above but solving them in each scenario has solidified the same.