Time Value of Money.
1. If you were to win $1,000,000 in the state lottery and had a choice to either receive $50,000 a year for 20 years or $560,000 now, which would you choose and why? What factors would you need to consider?
2. Construct some simple examples to illustrate your answers to the following:
a. If interest rates rise, bond prices rise or fall?
b. If the bond yield is greater than the coupon, is the price of the bond greater or less than 100?
c. If the price of a bond exceeds 100, is the yield greater or less than the coupon?
d. Do high-coupon bonds sell at higher or lower prices than low-coupon bonds?
e. If interest rates change, does the price of high-coupon bonds change proportionately more than that of low-coupon bonds?
Please see attached Excel file for the full solution.
Given that all other factors are the same for both scenarios, I would ...
This solution discusses and illustrates the impact of interest rates on bond value using specific examples.