Suppose that someone owns a 30-year $13,000 T-bond with a rate of 4%. After 5 years the bond is sold for cash, but interest rates have risen to 5.5%. (a) How much has the bond paid in total for the first 5 years? (b) How much will the bond pay the person buying it over the next 25 years? (c) How much is the bond currently worth? (a) Over the first 5 years, the bond has paid $ (Simplify your answer.) (b) Over the next 25 years, the bond will pay the buyer $ (Simplify your answer.) (c) The bond is currently worth $ (Simplify your answer. Round to two decimal places as needed.)
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So, the total payment over the first 5 years is 5 * 4% * $13,000 = $2,600. Show more…
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Bond A pays $\$ 8,000$ in 20 years. Bond B pays 88,000 in 40 years. (To keep things simple, assume that these are zero-coupon bonds, meaning the $\$ 8,000$ is the only payment the bondholder receives.) a. If the interest rate is 3.5 percent, what is the value of each bond today? Which bond is worth more? Why? (Hint: You can use a calculator, but the rule of 70 should make the calculation easy.) b. If the interest rate increases to 7 percent, what is the value of each bond? Which bond has a larger percentage change in value? c. Based on the example above, complete the two blanks in this sentence: "The value of a bond [rises/falls] when the interest rate increases, and bonds with a longer time to maturity are [more/less] sensitive to changes in the interest rate."
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Once purchased, bonds can be sold in the secondary market. The value of a bond depends on the prevailing interest rates, which vary over time. Suppose that, in January, 1982 , you bought a 30 -year zero coupon U.S. Treasury bond with a maturity value of $$\$ 100,000$$ and a yield of $15 \%$ annually. a. How much did you pay for the bond? b. In January 1999, your bond had 13 years remaining until maturity. Rates on U.S. Treasury bonds of comparable length were about $4.75 \%$. If you sold your bond to an investor looking for a return of $4.75 \%$ annually, how much money would you have received? c. Using your answers to parts (a) and (b), what was the annual yield on your 17 -year investment?
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