# Interest question HELP

• Apr 14th 2007, 10:20 AM
question
Interest question HELP
A government bond has a principal value of £30,000 and pays 4% on the principal for 25 years. what is the value of the bond to a prospective purchaser who wants a 5% annual rate of return?

Explain whether the value of the bond would be deemed higher or lower to a prospective purchaser who wants a 7 per cent annual rate of return?
• Jun 1st 2007, 09:21 PM
dwlu
Quote:

Originally Posted by question
A government bond has a principal value of £30,000 and pays 4% on the principal for 25 years. what is the value of the bond to a prospective purchaser who wants a 5% annual rate of return?

Explain whether the value of the bond would be deemed higher or lower to a prospective purchaser who wants a 7 per cent annual rate of return?

The value of the bond, which is the present value of the payments, decreases as the yield rate increases. This is because when calculating the value of the bond, as the yield rate 'i' increases, the discount factor v = 1/(1+i) decreases, and hence the present value of the payments decreases.

I think that's what the question is asking.