A bond with a term of 20 years, a coupon rate of 8% paid at the end of every year and a face value of $1,000 was purchased November 1. By November 2nd interest rates had dropped to 6%. What is the selling price of the bond on November 2nd?

Question

Quizplus · Accepted Answer

When interest rates drop, the price of existing bonds increases. The bond's price can be calculated using the present value of its future cash flows, discounted at the new interest rate of 6%. The bond's annual coupon payment is $80, and the present value of these payments plus the face value discounted at 6% results in a price of approximately $1,229.

A Bond with a Term of 20 Years, a Coupon