Response: We Use a Present Value Table to Look

question 10

Multiple Choice

Response: We use a present value table to look up the value of the $1000 principal to be paid 8 years or 16 semi-annual periods. Looking at the 3% row (rate per semi-annual period) , we find the factor of .623. Multiplying by $1000, the investor is selling the value of the principal for $623.00. Using a present value of an annuity table, we also look up R=3% and N=16 to find the factor 12.561. Multiplying 12.561 times the $40 semi-annual coupon, we find our investor is selling the remaining stream of 16 coupon payments for $502.44. Thus the price of the bond is $623.00 + $502.44 = $1,125.44. But the bond originally cost our investor $1,000, so the capital gain is 125.44 (using financial calculator, the answer is $125.61) . Section: Measuring Bond Yields.
-What happens to the price of bonds, if interest rates go up?

• A) The price of bonds goes up.
• B) The price of bonds stays the same.
• C) The price of bonds goes down.
• D) The relationship between interest rates and bond prices cannot be determined.

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