Question

Suppose you received a gift of $2000 cash on your 21st birthday. Further suppose you used it to purchase a bond with no expiration date that pays annual interest of $100.

a. What is the annual yield rate on your bond?

b. What will be the market price of your bond if the interest rate on newly issued bonds of similar risk rises to 6%?

c. Alternatively, what will be the market price of your bond if the interest rate on newly issued bonds of similar risk falls to 4%? d. Complete the following: "Bond prices and interest rates are _____ related."

Answer #1

**Part A**

We know that the annual yield rate of bond is the percentage return on bond. The yield is,

in percentage terms is,

**Part B**

Here given the competitive bond is 6%. so nobody will interest to buy our bond unless it yields 6%. So the price of bond falls by,

It is remain competitive.

**Part C**

The return of our bond is $100 at the price of $2000 yield of 5%. it is highly desirable compared to other assets of 4% Now the selling price may rise,

**Part D**

Bond prices and interest rates are
**inversely** related

Today is your 21st birthday and your parents gave you a gift of
$2,000. You just put this money in a brokerage account, and your
plan is to add $1,000 to the account each year on your birthday,
starting on your 22nd birthday. If you earn 10 percent a year in
the brokerage account, what is the minimum number of whole years it
will take for you to have at least $1,000,000 in the account? a. 41
b. 43 c....

Bond price: Pierre Dupont just received a cash gift from his
grandfather. He plants to invest in a five-year bond issued by
Venice Corp. that pays an annual coupon rate of 5.5 percent. If the
current market rate is 7.25 percent, what is the maximum amount
Pierre should be willing to pay for this bond?

You are in a position where you decide to invest in bonds in the
market place. You are considering investing in the bonds
of Able Corp. Able Corp. bonds have a par value of
$1,000 each and pay annual interest of 7% and mature in 25 years.
Interest is paid semiannually.
The current annual rate of interest on bonds of similar risk in
the market place is 8% annually. This is also your
required rate of return. What price should you pay for...

Anthony Walker just received a cash gift from his grandfather.
He plans to invest in a five-year bond issued by Sandhill Corp.
that pays an annual coupon rate of 4.0 percent. If the current
market rate is 8.50 percent, what is the maximum amount Anthony
should be willing to pay for this bond? (Round answer to 2 decimal
places, e.g. 15.25.)
Anthony should pay
?

When the coupon rate on newly issued bonds decreases relative to
older, outstanding bonds, what happens?
A) The market price of the older bond falls in the secondary
market.
B) The market price of the older bond rises in the secondary
market.
C) Older bonds can still be sold at their face value.
D) Older bonds will sell for more than their face value.

Pierre Dupont just received a cash gift from his grandfather. He
plans to invest in a five-year bond issued by Venice Corp. that
pays an annual coupon of 4.86 percent. If the current market rate
is 9.51 percent, what is the maximum amount Pierre should be
willing to pay for this bond? (Round answer to 2
decimal places, e.g. 15.25.)
Pierre should pay
$

You are holding a bond with an annual coupon rate of 6% that
matures in 15 years. Interest is paid semiannually. Bonds recently
issued of similar risk have a coupon rate of 5%. What should your
bond sell for in the secondary market?

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in half year. You have decided to invest it at 5% per annual until
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until you achieve your target?
b) You will receive fifty annual payments of $1,000 each
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Mark Harris just received a cash gift from his grandfather. He
plans to invest in a five-year bond issued by Cullumber Corp. that
pays an annual coupon rate of 4.5 percent. If the current market
rate is 7.50 percent, what is the maximum amount Mark should be
willing to pay for this bond? (Round answer to 2 decimal places,
e.g. 15.25.) Mark should pay $enter the maximum amount that should
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1.Jorge and Anita, married taxpayers, earn $145,000 in taxable
income and $40,000 in interest from an investment in City of Heflin
bonds. Using the U.S. tax rate schedule for married filing jointly,
how much federal tax will they owe?
2.Melinda invests $100,000 in a City of Heflin bond that pays 3
percent interest. Alternatively, Melinda could have invested the
$100,000 in a bond recently issued by Surething, Inc. that pays 4
percent interest with similar risk and other nontax characteristics...

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