Last year,Bentley bought a bond for $1,000 that promises to pay $115 a year.This year,a person who buys a bond for $1,000 receives $125 a year.If Bentley were to sell his (old)bond,its price would be approximately

Question

Quizplus · Accepted Answer

Bentley's bond pays $115 a year, so his yield is 11.5% ($115/$1,000). When interest rates rise, bond prices fall in order to make the yield of the old bond competitive with the new bonds being issued. In this case, the new bonds are paying $125 a year, which corresponds to a yield of 12.5% ($125/$1,000). Since this is higher than the yield on Bentley's bond, its price will fall in order to bring its yield up to 12.5%. The new price can be calculated as follows:

$125 / 0.125 = $1000 (the price at which a new bond pays $125 a year)
$115 / x = 0.125 (solve for x, the new price of Bentley's bond)
x = $920

Therefore, if Bentley were to sell his bond, he would receive approximately $920.

Last Year,Bentley Bought a Bond for $1,000 That Promises to Pay