If a $1,000 bond has a coupon rate of 11% and the market interest rate drops to 7%,what would a person expect to pay for that bond?

Question

Quizplus · Accepted Answer

When the market interest rate drops, the value of existing bonds with higher coupon rates increases. To calculate the expected price of the bond, we can use the formula:
Bond price = (Annual coupon payment ÷ Market interest rate) x (1 - (1 ÷ (1 + Market interest rate)^Number of years)) + (Face value ÷ (1 + Market interest rate)^Number of years)
Plugging in the values, we get:
Bond price = (110 ÷ 0.07) x (1 - (1 ÷ (1 + 0.07)^10)) + (1000 ÷ (1 + 0.07)^10) = $1,571.43

If a $1,000 Bond Has a Coupon Rate of 11