Question

Eight years ago Burt Brownie purchased a government bond that pays point zero percent interest. The face value of the bond was one thousand dollars. A) $1,000 B) $800 C) $500 D) $0

Answer 1

The government bond price after 8 years for Burt Brownie at zero percent interest is $7379.11.

Step-by-step explanation:

Given the change in interest rates, you would expect to pay less than $10,000 for the bond.

When interest rates rise, the value of existing bonds decreases because they offer a lower return compared to new bonds with higher interest rates.

You can calculate the price you would actually be willing to pay for the bond using the formula:

Bond Price = (Annual Interest Payment / Interest Rate) * (1 - (1 / (1 + Interest Rate) ^ Remaining Years)) + Face Value / (1 + Interest Rate) ^ Remaining Years

Substituting the values, you would calculate:

Bond Price = ($600 / 0.09) * (1 - (1 / (1 + 0.09) ^ 9)) + $10,000 / (1 + 0.09) ^ 9

= $7379.11

Therefore, the bond price after 8 years is $7379.11.