Question

Consider a government bond that promises to pay $10,000 in one year. a) What is the...

Consider a government bond that promises to pay $10,000 in one year.

a) What is the interest rate (yield to maturity) on the bond, if the price today is $9,600, $90,000, and $85,000?
b) What is the price of the bond when the interest rate is 3% and when it is 8%?

c) What is the relationship between the interest rate and the price of the bond?

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Homework Answers

Answer #1

Answer for a)

YTM when Price today $9600 is 10000-9600/10000=400/10000=4%

YTM when Price today $9000 is 10000-9000/10000=1000/10000=10%

YTM when Price today $8500 is 10000-8500/10000=1500/10000=15%

Answer for B)

When interest rate is 3% then Price of Bond =10000-0.03(10000)=9700

When interest rate is 8% then Price of Bond=10000-0.08(10000)=9200

Answer for C)

There is inverse relationship between Price and Interest rate as Price increaes interest rate decreases and vice versa

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