Response: We Use a Present Value Table to Look

question 20

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.
-Which of the following bonds will be most sensitive to changes in market interest rates?

• A) 8 percent semiannual coupon with 8 years to maturity.
• B) 6 percent semiannual coupon with 8 years to maturity.
• C) 8 percent semiannual coupon with 6 years to maturity.
• D) 6 percent semiannual coupon with 6 years to maturity.

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Definitions:

Adult Children

Individuals who are legally adults, often considered within the context of their relationship with their parents or their adjustment to adult roles.

Intergenerational Relationships

Relationships between people of different generations, which can provide valuable life lessons, cultural exchange, and emotional support.

Emotionally Close

Describes a relationship characterized by strong, supportive, and affectionate bonds between individuals.

Newly Formed

Pertains to something that has recently come into existence or has been recently established or created.