Homework Answers
(1)
Current bond price ($) = Price after 1 year / (1 + Interest rate) = 100 / (1 + 0.05) = 100 / 1.05 = 95.24
(2)
When interest rate is 2%,
Current bond price ($) = Price after 1 year / (1 + Interest rate) = 100 / (1 + 0.02) = 100 / 1.02 = 98.04
Therefore, bond price will be higher by $(98.04 - 95.24) = $2.8.
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