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27 May, 03:15

If you purchase for $1,000 a bond that pays $40 annually to the holder, and then "the" (that is, the market) interest rate rises to 8 percent, the price of that bond would now be:

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  1. 27 May, 06:24
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    Generally when interest payments increases, bond prices falls

    Explanation:

    If you purchase for $1,000 a bond that pays $40 annually to the holder, and then "the" (that is, the market) interest rate rises to 8 percent, the price of that bond would now be the present value of the future payments

    Assume that the bond will last for 3 years to maturity

    Interest payments at $40 = Total of $120 for 3 years

    Interest payments at $80 = Total of $240 for 3 years

    The additional interest payment from the growth will adjusted against the bond value of $1000 which will then be $1000 - (240 - 120). The bond price will fall to $880

    Generally when interest payments increases, bond prices falls
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