Price of Bond
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1. Explain what happens to the price of a bond that pays a fixed percent of the face value every year when interest rates in the economy increase.
2.Suppose that a stock has a price that gives it the same expected rate of return as a bank account. Explain why this is not an equilibrium situation.
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The solution goes into a great amount of detail related to the bond question being asked. The solution is very easy to follow along and can be easily understood by anyone with a basic understanding of the concepts. The solution answers all the question(s) being asked in a succinct way. Overall, an excellent response.
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1. As the interest rates in the economy rise, the present value of the future cash flows of the bond will keep on falling. Thus, the price of the bond will fall. The price of the bond may be higher or lower than the face value ...
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