Suppose the discount rate is 5 percent and a bond promises to pay $200 per year

Question

Suppose the discount rate is 5 percent and a bond promises to pay $200 per year for 10 years starting in one year and $800 at the date of maturity. What will be the price of the bond today? If the discount rate remains constant, what will be the price of the bond in 5 year’s time? Please show and explain.

If the nominal interest rate is 4 percent and expected inflation is 1 percent, what is the real interest rate? Please show your work. Suppose instead that the nominal interest rate is 80 percent and the expected inflation rate is 40 percent.

Explanation / Answer

Q1) Suppose the discount rate is 5 percent and a bond promises to pay $200 per year for 10 years starting in one year and $800 at the date of maturity. What will be the price of the bond today? If the discount rate remains constant, what will be the price of the bond in 5 year’s time? Please show and explain.

a)

Price of the bond today = pv(rate,nper,pmt,fv)

rate = 5%

nper = 10

pmt = 200

fv = 800

Price of the bond today = pv(5%,10,200,800)

Price of the bond today = $ 2035.48

b)

Price of the bond in 5 year’s time = pv(rate,nper,pmt,fv)

rate = 5%

nper = 5

pmt = 200

fv = 800

Price of the bond in 5 year’s time = pv(5%,5,200,800)

Price of the bond in 5 year’s time = $ 1492.72

Note : Please dont ask multiple question in single question, Please ask seperately

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