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Author Question: Suppose that a bond promises to pay 107 next year but the interest rate falls from 7 percent to 3 ... (Read 100 times)

AEWBW

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on: Jun 29, 2018
Suppose that a bond promises to pay 107 next year but the interest rate falls from 7 percent to 3 percent per year. How much will the price of the bond be and why?
 
  What will be an ideal response?

Question 2

Which of the following tariffs resulted in worldwide retaliation against the United States during the Great Depression?
 
  A) the Chicken tariff B) the Pasta Tariff
  C) the Smoot-Hawley tariff D) the Tariff of Abominations


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raili21

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Reply #1 on: Jun 29, 2018
Answer to Question 1

At 7 interest the price of the bond would have been 100 because you would need 100 invested at 7 to receive 107 next year. If the interest rate falls to 3 we can use the formula that says the price of the bond is the promised payment divided by one plus the interest rate to calculate that the price would now be 103.88. The price of the bond has risen because at the lower interest rate you would need to invest a larger sum in order to receive 107 next year.

Answer to Question 2

C


AEWBW

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Reply 2 on: Jun 29, 2018
Thanks for the timely response, appreciate it

bigcheese9

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Reply 3 on: Yesterday
Gracias!

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