Question

Suppose a bond with no expiration date annually pays a fixed amount of interest of $700.

a. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed below or the bond price at each of the interest yields shown.

Instructions: Enter your answers in the gray-shaded cells. For bond prices, round your answers to the nearest hundred dollars. For interest yields, round your answers to 2 decimal places.

Answer 1

Bond Price / Interest Yield, %

$8,500 / 8.24%

$9,500 / 7.37%

$10,500 / 6.67%

$11,500 / 6.09%

$13,500 / 5.19%

Explanation:

To calculate the interest rate or bond price, we can use the following formula:

Bond price = Annual interest payment / Interest rate

For a bond price of $8,500:

Interest rate = Annual interest payment / Bond price

Interest rate = $700 / $8,500

Interest rate = 0.0824 or 8.24%

For an interest yield of 7.37%:

Bond price = Annual interest payment / Interest rate

$8,500 = $700 / 0.0737

Bond price = $9,500.20 or $9,500 (rounded to the nearest hundred dollars)

For a bond price of $10,500:

Interest rate = Annual interest payment / Bond price

Interest rate = $700 / $10,500

Interest rate = 0.0667 or 6.67%

For a bond price of $11,500:

Interest rate = Annual interest payment / Bond price

Interest rate = $700 / $11,500

Interest rate = 0.0609 or 6.09%

For an interest yield of 5.19%:

Bond price = Annual interest payment / Interest rate

$8,500 = $700 / 0.0519

Bond price = $13,481.86 or $13,500 (rounded to the nearest hundred dollars)

So the completed table is:

Bond Price / Interest Yield, %

$8,500 / 8.24%

$9,500 / 7.37%

$10,500 / 6.67%

$11,500 / 6.09%

$13,500 / 5.19%