Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. An important new client, the North-Western Municipal Alliance, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them by answering the following questions. (Need an answer and explanation).

E2. What would happen to the bonds value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond?

E3. What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%?

Question

Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. An important new client, the North-Western Municipal Alliance, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them by answering the following questions. (Need an answer and explanation).

E2. What would happen to the bonds value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond?

E3. What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%?