If you own a $1000 face value bond with 1 year remaining to maturity and a 5 per cent interest rate,and new bonds are paying 12 per cent,what is the most you can get for your old bond?

Question

Quizplus · Accepted Answer

Since the new bonds are paying 12%, the market interest rate has gone up. This means that the value of your old bond has decreased since it pays a lower interest rate. To calculate the most you can get for your old bond, you need to calculate its present value. Using the formula for present value of a bond, you can solve for the present value:
PV = (coupon payment / (1 + market interest rate)^time period) + (face value / (1 + market interest rate)^time period)
PV = (50 / 1.12) + (1000 / 1.12)
PV = 44.64 + 892.86
PV = $937.50
Therefore, the most you can get for your old bond is $937.50.

If You Own a $1000 Face Value Bond with 1