Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is:

Question

Quizplus · Accepted Answer

When market interest rates fall, previously issued bond prices rise. This is because previously issued bonds offer a greater reward than newly issued ones. The price Pat would receive is $10,095 (= $10,600/1.05).

Pat Pays $10,000 for a Newly Issued Two-Year Government Bond