Quirk Drugs sold an issue of 30-year, $1,000 par value bonds to the public that carry a 10.85% coupon rate, payable semiannually. It is now 10 years later, and the current market rate of interest is 9.00%. If interest rates remain at 9.00% until Quirk's bonds mature, what will happen to the value of the bonds over time?

Question

Quizplus · Accepted Answer

The bonds were issued with a coupon rate higher than the current market interest rate (10.85% vs. 9.00%), so they will sell at a premium. As they approach maturity, their value will converge to the par value, meaning they will decline in value until they reach $1,000 at maturity.

Quirk Drugs Sold an Issue of 30-Year, $1,000 Par Value