Holooly Plus Logo
Holooly Plus Logo

Question 5.T-Y-S.L: In your own words, explain to your grandmother why the value...

In your own words, explain to your grandmother why the values of various government bonds go up when the interest rates in the U.S. economy drops. (5.3)

The Blue Check Mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

Because the face value (what a bond is worth at maturity) of a bond and its interest payout are fixed, the trading price of a bond will increase as interest rates go down. This is because people are willing to pay more money for a bond to obtain the fixed interest rate in a declining interest rate market. For instance, if the bond pays 8 \% per year, people will pay more for the bond when interest rates in the economy drop from, for example, 6 \% to 5 \% per year.

Related Answered Questions

A Proposed Capital Investment to Improve Process Yield Many engineering projects aim at improving facility utilization and process yields. This case study illustrates an engineering economy analysis related to the redesign of a major component in the manufacture of semiconductors. Semiconductor man

Verified Answer:
You start your economic evaluation of the engineer...

A small start-up biotech firm anticipates that it will have cash outflows of $200,000 per year at the end of the next 3 years. Then the firm expects a positive cash flow of $50,000 at the EOY 4 and positive cash flows of $250,000 at the EOY 5–9. Based on these estimates, would you invest money in t

Verified Answer:
Find the IRR: \begin{aligned}0=&-\$ 200...

The “Arctic Express” mutual fund company invests its monies in Russia. They claim that money invested with them will quadruple in value over the next 10 years. Suppose you decide to invest $200 per month for the next 10 years in this fund. If their claim is true, what effective annual rate of retur

Verified Answer:
Letting A=\$ 200 per month, we solv...

An assembly operation at a software company now requires $100,000 per year in labor costs. A robot can be purchased and installed to automate this operation. The robot will cost $200,000 and will have no market value at the end of the 10-year study period. Maintenance and operation expenses of the

Verified Answer:
P W=0=-\$ 200,000+(\$ 100,000-\$ 64,000)\l...

Anderson County has 35 older-model school buses that will be salvaged for $5,000 each. These buses cost $144,000 per year for fuel and maintenance. Now the county will purchase 35 new school buses for $40,000 each. They will travel an average of 2,000 miles per day for a total of 360,000 miles per

Verified Answer:
Investment cost of new buses =35(\$ 40,000-...

An office supply company has purchased a light duty delivery truck for $15,000. It is anticipated that the purchase of the truck will increase the company’s revenue by $10,000 annually, whereas the associated operating expenses are expected to be $3,000 per year. The truck’s market value is expecte

Verified Answer:
\begin{aligned}\mathrm{AW}(18 \%)=&-\$ ...

A drug store is looking into the possibility of installing a 24/7-automated prescription refill system to increase its projected revenues by $20,000 per year over the next 5 years. Annual expenses to maintain the system are expected to be $5,000. The system will cost $50,000 and will have no market

Verified Answer:
\operatorname{AW}(20 \%)=-\$ 50,000(A / P, ...

The cash flow diagram below has an internal rate of return of 35%. What is the value of Y if perpetual service is assumed? (5.3)

Verified Answer:
\begin{aligned} & \$ 1,000,000+\$ 500,0...

A company has issued 10-year bonds, with a face value of $1,000,000, in $1,000 units. Interest at 8% is paid quarterly. If an investor desires to earn 12% nominal interest (compounded quarterly) on $10,000 worth of these bonds, what would the purchase price have to be? (5.3)

Verified Answer:
Desired yield per quarter =12 \% / 4=3 \% ;...

The higher the FICO score, the lower the interest rate on a car loan. For example, the total interest paid on a $20,000 car loan over 3 years will be $2,181 for a FICO score of 660. The total interest on a $20,000 car loan with a FICO score of 760 w

Verified Answer:
Assume a monthly compounding frequency to match th...