Question

Answer the next question on the basis of the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10%. If the price of this bond falls by $200, the interest rate will __________.a. fall by 2.5 percentage points.
b. rise by 5 percentage points.
c. fall by 5 percentage points.
d. rise by 2.5 percentage points.

Answer 1

If the price of this bond falls by $200, the interest rate will

d. rise by 2.5 percentage points.

Explanation:

• Bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10%. If the price of this bond falls by $200, the interest rate will rise by 2.5 percentage points.
• Bond valuation is the determination of the fair price of a bond.
• the theoretical fair value of a bond is the present value of the flow of cash that streams in it is expected time to generate.
• In order to calculate the bond price, one has to simply discount the known predict flow of cash.
• When investors get anxious, they buy government bonds. Governments usually pay back their debts, so those bonds are at safety.
• You can also lose money on a bond if you sell it before the maturity date for less than you paid or if the issuer pays on their payments.