John invested in a new issue corporate bond on the primary market for $1,000, with a coupon rate of 7%, and a maturity date of 2025. The bond was held in his brokerage account electronically, so he did not think about it on a daily basis. In 2020, he thought about selling the bond on the secondary market to help pay for his school tuition. At that time, interest rates had climbed to 8.5%. This was great news for John because now he could sell his bond for more than the principal amount he would receive in 2025.

Question

Quizplus · Accepted Answer

The price of bonds and the market interest rate have an inverse relationship. Although John would receive interest = 7% annually on his bond, interest rates on new issue long-term bonds of similar quality had risen to 8.5%. Investors would not be willing to offer John $1,000 for his bond when they could buy a new issue $1,000 bond guaranteed to pay 8.5% annually. They may be willing to pay something less than $1,000 for John's bond.

John Invested in a New Issue Corporate Bond on the Primary