A $10,000 face value bond costs $9,250 and matures in one year. If the interest rate on similar bonds rises by 2%, what is the approximate price change for this bond?
A) The price of the bond rises to $9,804.
B) The price remains unchanged at $9,250.
C) The price of the bond falls to $9,082.
D) The price of the bond rises to $9,424.

Question

Quizplus · Accepted Answer

A rise in interest rates causes bond prices to fall, so the price of the bond will decrease. To calculate the new price, we can use the bond price formula:

new price = old price / (1 + r)

where r is the new interest rate. Since the interest rate has risen by 2%, r = 0.02, so:

new price = $9,250 / (1 + 0.02) = $9,082.

Therefore, the approximate price change for this bond is a decrease of $168. Answer choice C is correct.

A $10,000 Face Value Bond Costs $9,250 and Matures in One