Ms. Jones purchased a 20-year Treasury bond bearing a 12% coupon rate. She purchased the bond at par ($1,000). If rates fall to 9%, what will be the new price of the bond?

Question

Quizplus · Accepted Answer

When interest rates fall, the price of existing bonds with higher coupon rates increases because they pay more interest than new bonds issued at the current lower rates. The new price can be calculated using the present value of the bond's future cash flows (interest payments and principal repayment) discounted at the new interest rate. Since the bond was initially purchased at par and has a higher coupon rate (12%) than the new market rate (9%), its price will increase. The exact calculation requires a financial calculator or a present value formula, but among the provided options, $1,333 is the correct choice, indicating an increase in the bond's price due to the decrease in interest rates.

Ms Jones Purchased a 20-Year Treasury Bond Bearing a 12