Question

Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800.a. In the table provided below, calculate and enter 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: Enter your answers in the gray-shaded cells. For bond prices, round your answers to the nearest hundred dollars. For interest yields, round your answers to 2 decimal places.b. What generalization can you draw from the completed table?

Answer 1

1. The calculation of the interest rates and bond prices are as follows:

Bond Price Interest Yield, %      Calculations

$ 8,000           10.00%               10% ($800/$8,000 x 100)

$ 9,000            8.90%         $9,000 ($800/8.9%)

$10,000            8.00%                8% ($800/$10,000 x 100)

$12,903             6.2%                   $12,903 ($800/6.2%)

2. The generalization drawn from the completed table is A. Bond price and interest rate are inversely related.

The generalization about the relationship between bond price and interest rate is not that bond price and interest rate:

• B. Are not related
• C. Are directly related
• D. No sufficient data for generalization.

Thus, bond price and interest rate are inversely related.

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