You pay $10,000 for a one-year bond with a $10,000 original value and a single fixed payment of $400 at the end of the year. You hold the bond until the year is up, but during that time, the market price of the bond falls to $8,000. The interest rate on your investment will be 4 percent.

Question

Quizplus · Accepted Answer

The interest rate (or yield) on your investment is determined by the fixed payment you receive relative to the amount you paid for the bond, not by changes in the market price of the bond. Since you receive $400 on a $10,000 investment, the interest rate is indeed 4 percent ($400/$10,000 = 0.04 or 4%). Changes in the market value of the bond do not affect the interest rate of your specific investment.

You Pay $10,000 for a One-Year Bond with a $10,000