A $1000 bond with a coupon rate of 5.4% paid semiannually has five years to maturity and a yield to maturity of 7.5%. If interest rates rise and the yield to maturity increases to 7.8%, what will happen to the price of the bond?

Question

Quizplus · Accepted Answer

When interest rates rise, the prices of existing bonds fall. This is because the bonds with the lower coupon rate become less attractive to investors since they offer a lower return compared to newly issued bonds with higher coupon rates. As a result, the demand for existing bonds decreases, and their prices fall. Using the bond pricing formula, we can calculate that the price of the bond would fall by $11.59 if the yield to maturity increases from 7.5% to 7.8%. Therefore, the correct answer is option C.

A $1000 Bond with a Coupon Rate of 5