Question

suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $900.

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 below 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.  

Bond Price Interest Yeild

$8,000 ___________?

________? 10.00%

10,000 ___________?

11,000 ____________?

_______? 6.92%

Answer 1

Annual Interest=R=$900

Let interest yield is i

Price of bond, P=R/i

i)

In case bond price, P, is $8000

We know P=R/i

or i=R/P=900/8000=11.25%

ii)

In case, interest yield, i, is 10%

We know P=R/i

P=900/10%=$9000

iii)

In case bond price, P, is $10000

We know P=R/i

or i=R/P=900/10000=11.25%

iv)

In case bond price, P, is $11000

We know P=R/i

or i=R/P=900/11000=8.18%

v)

In case, interest yield, i, is 6.92%

We know P=R/i

P=900/6.92%=$13005.78

If you take price to be $13000, i=R/P=900/13000=6.923%

Difference is due to rounding of interest yield rates.

Since we are given i=6.92%

We should take the price to be $13005.78 as per our calculations