Answered: Consider a bond without an expiration…

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section9.1: Present Value: Measuring The Time Value Of Money

Problem 1QQ

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Question

Consider a bond without an expiration date that makes a fixed interest payment of $210 per year.

Complete the following table by calculating the interest rate on the bond at different sale prices. (Hint: The effective interest rate on a bond is a ratio of the interest payment to the sale price of the bond times 100.)

Price of Bond	Interest Rate
(Dollars)	(Percent)
1,200
1,000
750
600

Use the blue points (circle symbol) and the preceding table to plot the relationship between bond prices and interest rates on the following graph.

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

The line showing the relationship between bond prices and interest rates has a _____(POSITIVE/NEGATIVE) slope; in other words, there is _______(INVERSE / A DIRECT) relationship between bond prices and interest rates.

NOTE- THIS QUESTION IS DIVIDED INTO SUBPARTS . PLEASE ANSWER ALL QUESTIONS .

WITH AN EXPLANATION.

par p
Interest Rate (Percent)
35.0
31.5
28.0
24.5
21.0
17.5
14.0
10.5
7.0
3.5
0
500
600
700
Heres
RE
KATE
1000 1100
800
900
Price of Bond (Dollars)
1200 1300
Relationship
?
Mere Vis m

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