Question

An 83-week Treasury bill would have an effective interest rate of (to the nearest hundredth percent)? Assume it is a $10,000 Treasury bill.

a) 4.52%
b) 3.26%
c) 5.18%
d) 6.93%

Answer 1

When interest rates rise, bond prices usually decrease and when interest rates fall, bond prices usually increase.

Step-by-step explanation:

When interest rates rise, the price of bonds previously issued at lower interest rates will usually decrease. Similarly, when interest rates fall, the price of bonds previously issued at higher interest rates will usually increase. In this case, the bond was issued at a 6% interest rate, but interest rates are now 9%. Therefore, you would expect to pay less than $10,000 for the bond. To calculate the actual price you would be willing to pay for the bond, you need to determine the present value of the bond's cash flows based on the new interest rate.