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To borrow money from the public, firms sell bonds. A bond is just a piece of paper that obligates the firm to pay the holder of the piece of paper a fixed sum of money in each of a fixed number of periods. [(A)]* What is the maximum amount you would pay today for a bond that promised to pay you $5 (the coupon) at the end of each of the next three years, and $105 after four years (coupon + principal), assuming that the interest rate is 5 percent? Assuming that the interest rate is 10 percent? Assuming that the interest rate is 15 percent? [(B)]* If this bond is sold at auction, and if the interest rate is 10 percent, what is your prediction with respect to its price? Explain. What sort of relationship would you expect to see between the price of bonds and the interest rate?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M9449465

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