You hold a $1,000 bond that has an interest rate of 5 percent.If comparable interest rates rise to 10 percent, and you decide to sell this bond, the price you receive will be

Question

Quizplus · Accepted Answer

When comparable interest rates rise, the value of existing bonds with lower interest rates decreases in order to be competitive with new bonds issued at the higher rate. The price of a bond with a 5 percent interest rate would have to decrease in order for its yield to match the 10 percent yield of comparable bonds. The calculation for determining the new price of the bond is: 
New price = (Interest payment / New interest rate) + (Face value / (1+New interest rate)^n)
Assuming the bond has a maturity of one year, the new price would be:
New price = ($50 / 0.1) + ($1,000 / 1.1) = $500 + $909.09 = $1,409.09
Therefore, if you sold the bond, you would receive $1,409.09.

You Hold a $1,000 Bond That Has an Interest Rate