91Ó°ÊÓ

Using Table 10-2:

a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year time period.

b. Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. Using column 3, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year period.

c. Based on the information in part a, if you think interest rates in the market are going down, which bond would you choose to own?

d. Based on information in part b, if you think interest rates in the market are going up, which bond would you choose to own?

Step by step solution

01

a. Indicate the bond price at 8 percent yield to maturity – 

Maturuty year	Bond Price
10 years	$1,134.20
15 years	$1,171.24
20 years	$1,196.34

02

b. Indicate the bond price at12 percent yield to maturity -

Maturuty year	Bond Price
10 years	$886.97
15 years	$863.80
20 years	$850.67

03

c. Choosing a bond when interest rate goes down-

If the interest rate in the market goes down, compare to short term bonds the long term bonds will decrease. So it is recommendated to hold short term bonds. 10 years bonds of part Ashould be considered.

04

d. Choosing a bond when interest rate goes up-

If the interest rate in the market goes up, compare to short term bonds the long term bonds will increase. So it is recommendated to hold long term bonds. 20 years bonds of part Bshould be considered.

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