Chapter 17: Q 8. (page 426)
You open a 5-year CD for $1,000 that pays 2% interest, compounded annually. What is the value of that CD at the end of the five years?
$1102.50
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Suppose Ford Motor Company issues a five year
bond with a face value of \(5,000 that pays an annual coupon payment of \)150.
a. What is the interest rate Ford is paying on the
borrowed funds?
b. Suppose the market interest rate rises from 3% to 4% a year after Ford issues the bonds. Will the
value of the bond increase or decrease?
You and your friend have opened an account on
E-Trade and have each decided to select five similar companies in which to invest. You are diligent in monitoring your selections, tracking prices, current events, and actions the company has taken. Your friend chooses his companies randomly, pays no attention to the financial news, and spends his leisure time focused on everything besides his investments. Explain what might be the performance for each of your portfolios at
the end of the year.
Explain what happens in an economy when the
financial markets limit access to capital. How does this affect economic growth and employment?
How much money do you have to put into a bank
account that pays 10% interest compounded annually to have $10,000 in ten years?
Imagine that a local water company issued \(10,000
ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%.
a. Given the change in interest rates, would you
expect to pay more or less than \)10,000 for the
bond?
b. Calculate what you would actually be willing to
pay for this bond.
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