1. I purchase a 1-year 5 percent bond for $1000. If I decide on an immediate res

Question

                    1. I purchase a 1-year 5 percent bond for $1000. If I decide on an immediate resale, how much will I get for the bond if                 

                

                    a) the interest rate has dropped to 3.5 percent?                 

                

                    b) the interest rate has risen to 7.5 percent?                 

                

                    c) the interest rate has risen to 8 percent?                 

I purchase a 1-year 5 percent bond for $1000. If I decide on an immediate resale, how much will I get for the bond if the interest rate has dropped to 3.5 percent? the interest rate has risen to 7.5 percent? the interest rate has risen to 8 percent?

Explanation / Answer

a) the interest rate has dropped to 3.5 percent?

price = (1000)/(1+3.5%) =

a) the interest rate has dropped to 7.5 percent?

price = (1000)/(1+7.5%) =

c) the interest rate has risen to 8 percent?

price = (1000)/(1+8%) =

$966.18

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