The interest rate for a $1,000 bond is 9 percent. If comparable bonds are paying 7 percent, what is the approximate market value for of the 9 percent bond?

Question

Quizplus · Accepted Answer

The bond's interest rate of 9% is higher than the current market rate of 7%, meaning the bond is more desirable than similar bonds currently available. Therefore, investors would be willing to pay more than the bond's face value of $1,000 to purchase it. To calculate the approximate market value, divide the bond's annual interest payment ($90) by the current market rate of 7% (.07) to get a present value of $1,286. This means that the bond is trading at a premium to its face value.

The Interest Rate for a $1,000 Bond Is 9 Percent