Log in
Economics
1
answer
0
watching
212
views

(a) Assume that a one year bond that has no interest coupon payment with a maturity value (face value) of $1,000 sold for $800. What is the interest rate that this bond will pay when it matures? Please show how you got your answer.


(b) If the prices of similar bonds are selling next month for $70, what is the interest rate that these bonds pay now when they mature. Please show how you got your answer.

(c) Please describe the relationship between bond prices and interest rates. Use the numbers above to support your answer.

Watch
1
answer
0
watching
212
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Chika Ilonah
Chika IlonahLv10
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

4. (4 points)
(a) Assume that a one year bond that has no interest coupon payment with a maturity value (face value) of $1,000 sold for $900. Show the interest rate that this bond will pay when it matures.
(b) If the prices of similar bonds are selling next month for $950, show the interest rate that these bonds pay when they mature.

Market shares of chocolate makers are in the table.


Firm

Market share
(percent)

Mayfair, Inc

15

Bond, Inc

10

Magic, Inc

25

All Natural, Inc

10

Truffles, Inc

25

Gold, Inc

15

a. Calculate the four firm concentration ratio.

b. Calculate the Herfindahl-Hirschman Index.

5. If the interest rate is 6 percent, what is the present value of a bond that matures in two years, pays $85 one year from now and $1,085 two years from now?

6. Suppose that eLake, an online auction site, is paying a dividend of $2 per share. You expect this dividend to grow 4 percent per year, and the interest rate is 10 percent.

a) What is the most you would be willing to pay for a share of stock in eLake?

b) If the interest rate is 6 percent, what is the most you would be willing to pay?

c) Comparing your answers to a and b, when interest rates decline, would you expect stock prices in general to rise or fall?

This assignment requires the following knowledge: For k different events, if the probability that each of them happens is p (0 < p < 1) and all events happen independently, the probability that all events happen together is p^k.
1. Five firms, namely A, B, C, D and E, issue discounted bonds with face value $1,000 and maturity 5 years in the market. All firms are pretty risky and each of them has a chance of 0.5 of collapse during the five years (thus bankrupted and can not pay back the bond accordingly). The bonds are all sold at an interest rate of 50% (the value is not surprising due to the extremely high risk of default).
(1) What is the present value of the bond given the interest rate, the face value and the maturity? Hint: we temporarily do not consider the issue of default.
(2) Say now you buy one bond from each of the five firms, what is the total amount you lend out today? Eventually only one firm does not fail and pays back the bond, what is the money you collect back 5 years later? You gain or loss in this case? If more than one firm pays back the bond, will you get more money back?
(3) What is the chance (probability) that you get nothing back assuming that firms fail independently? Together with the answer in (2), is it a good deal to buy one bond from each of the five firms?
(4) Repeat (2) and (3) with the only difference that now you buy 5 bonds from a single firm.
(5) Now we assume that the five firms all have similar businesses in Greece (and those are their only businesses), therefore, all firm fail together if the economy in Greece fails. Will you answer in (3) change?

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in