Chapter 4 solutions

Chapter 4 solutions - prices will rise more than short-term...

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Chapter Four 1. If i= 20%, PV = $1/1.2 = $0.83. If i=10%, PV = $1/1.1 = $0.91. 2. No. () () 000 , 000 , 10 $ 1 000 , 000 , 1 $ 1 000 , 000 , 1 $ 1 000 , 000 , 1 $ 10 2 < + + + + + + i i i L 3. () () 000 , 3 $ 1 . 1 331 , 1 $ 1 . 1 210 , 1 $ 1 . 1 100 , 1 $ 3 2 = + + 4. Less than 10%. If YTM = 10% when P = $3,000, it must be less than 10% when P > $3,000. 6. i = (F-P)/P = (1000 – 800)/800 = 25% 12. Bond prices rise when interest rates fall. Long-term bonds have greater interest- rate risk than short-term bonds. For a given fall in interest rates, long-term bond
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Unformatted text preview: prices will rise more than short-term bond prices. You would rather be holding long-term bonds if there is a decline in interest rates. 14. Use real interest rates. 5% - 2% = 3%. 10% - 9 % = 1%. People will be more likely to buy homes, since the cost of borrowing has declined in real terms....
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