Question

Imagine that at time t the interest rate is equal to 5% and you choose to purchase a bond that mature in 10 years that pays a coupon of 50 and has a face value of 1000 . What is the value of bond in period t+1 when the interest rate falls to 4% ? 1000 1074 1081 50

Answer 1

To calculate the value of the bond in period t+1 when the interest rate falls to 4%, we can use the present value formula for a bond:

Bond Value = Coupon Payment / (1 + Interest Rate) + Coupon Payment / (1 + Interest Rate)^2 + ... + Coupon Payment / (1 + Interest Rate)^n + Face Value / (1 + Interest Rate)^n

In this case, the coupon payment is 50, the face value is 1000, the interest rate in period t is 5%, and the interest rate in period t+1 is 4%. The bond matures in 10 years.

Let's calculate the bond value in period t+1:

Bond Value = 50 / (1 + 0.04) + 50 / (1 + 0.04)^2 + ... + 50 / (1 + 0.04)^10 + 1000 / (1 + 0.04)^10

Using a calculator, the bond value in period t+1 is approximately 1081. Therefore, the correct answer is 1081.