Asked by
Chase Hickey
on Dec 01, 2024
Verified
The interest rate is 9% and there is no inflation.A bond is available that can be redeemed either after one year or after two years.If it is redeemed after one year, the investor gets $109.If it is redeemed after two years, the investor gets $115.54.The investor gets no other payments than what she receives when she redeems the bond.In equilibrium, investors will be willing to pay more than $100 for this bond.
Redeemed
The process of exchanging a financial instrument or coupon for its value in money or goods.
Inflation
The speed at which the overall price level of goods and services increases, leading to a decrease in buying power.
Bond
A financial tool that signifies a lending agreement where an investor lends money to a borrower, usually a company or government entity, guaranteeing a fixed return.
- Understand the concept of present value and how it applies to investments.
- Identify the impact of interest rates on the valuation of bonds and perpetual securities.
Verified Answer
AL
Learning Objectives
- Understand the concept of present value and how it applies to investments.
- Identify the impact of interest rates on the valuation of bonds and perpetual securities.