Chris 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, Chris sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price Chris receives is:

Question

Quizplus · Accepted Answer

When market interest rates rise, previously issued bond prices fall. This is because new bonds are now available with a higher rate of return, requiring a discount for existing bonds. The price Chris would receive is $9,907 (= $10,600/1.07).

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