3. Suppose that on January 1, 2020, you buy a bond for $3,000 that will pay interest of 2.6% per year compounded continuously for 20 years. You never withdraw any of the interest earned on the bond.

(a) What will the bond be worth on January 1, 2040?

(b) Suppose that on January 1, 2023, the prevailing rate of interest on bonds maturing on January 1, 2040 becomes 5% per year compounded continuously. Assume that the market value of your bond (as described in 3 (a)) becomes the present value that would yield the same amount on January 1, 2040 as your bond will give you. What will be the market value of your bond on January 1, 2023?

Answer rating: 100% (QA)

a To calculate the value of the bond on January 1 2040 we can use the continuous compound interest f... View the full answer