Who benefits more from the drop in the market interest rate

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Reference no: EM131292584

a. What is the present-day value of a 10-year discount bond with a face value of $1000 if the market interest rate is 7%?

b. What is the present-day value of a 10-year coupon bond with a face value of $1000 and a coupon rate of 7% (i.e., yearly interest payment of $70) if the market interest rate is 7%?

c. Suppose the market interest rate falls to 5%. Is this good news for the holders of the above two bonds? Why or why not?

d. Who benefits more from the drop in the market interest rate – the holders of the 10-year discount bonds or the holders of the 10-year coupon bonds? Explain why, preferably with the help of some math.

Reference no: EM131292584

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