7. Suppose a three year government bond is purchased at $1,000 when the market rate of...

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7. Suppose a three year government bond is purchased at $1,000 when the market rate of interest is 10%, which pays a coupon r

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Suppose a three year government bond is purchesed at $ 1000 when the market rate of interest is 10% which pays a coupon rate of 10% .Determine the market value of the bond if the market rate of interest decrease 8% right after the bond is issued.

Here,

Intial face value =$1000

Interest rate =10%

Coupon rate =10%

Time 3 year,

Now if interest rate falls to 8% we have,

Present value= $\large \frac{100}{1+.08}+\frac{100}{(1+.08)^2}+\frac{1100}{(1+.08)^3}$ Present value=$ $\large $ 1051.54$

As the rate decreases The price of a bond increase.The bond holder gains from such a decrease in interest rates.

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Answer 2

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