A $10,000 face value bond costs $9,250 and matures in one year. If the interest rate on similar bonds rises by 2 percent, what is the approximate price change for this bond?

Question

Quizplus · Accepted Answer

Using the bond pricing formula P = F / (1 + r)^n, where P is the price of the bond, F is the face value, r is the interest rate, and n is the number of years to maturity, we can find the current interest rate for the bond:

9,250 = 10,000 / (1 + r)^1
1 + r = 10,000 / 9,250
r = 8.11%

If the interest rate on similar bonds rises by 2%, then the new interest rate is 8.11% + 2% = 10.11%. Using the same bond pricing formula, we can find the new price of the bond:

P = 10,000 / (1 + 10.11%)^1
P = $9,082

Therefore, the approximate price change for this bond is a decrease of $9,250 - $9,082 = $168. So the best choice is C.

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