1. Suppose that you purchase a newly issued 10- year U.S. Treasury bond for $10,000. The bond...
Question:
1. Suppose that you purchase a newly issued 10- year U.S. Treasury bond for $10,000. The bond has a promised interest rate of 5 percent ($250 every six months). The stated interest rate of 5 percent (annual payment of $500 divided by the initial face value of $10,000) does not change over the life of the bond. Do you expect that the market value of the bond will be constant or variable over the life of the bond? Explain.
2. Calculate the present value of an investment with the following expected cash flows at a discount rate of 10 percent: year 1 = $500, year 2 = $600, and year 3 = $650. Recalculate the present value at discount rates of 15 percent and 5 percent.
3. Is the discount rate used by investors to value a given stock necessarily constant over time? Explain.
Discount RateDepending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
Step by Step Answer:
1 The market value is likely to be variable over the life of the bond T...View the full answer
Managerial Economics and Organizational Architecture
ISBN: 978-0073523149
6th edition
Authors: James Brickley, Clifford W. Smith Jr., Jerold Zimmerman
