A 10-year bond pays 5% on a face value of $1,000. If similar bonds are currently yielding 10%, what is the market value of the bond? Use annual analysis.
A) Less than $900
B) More than $900 and less than $1100
C) More than $1100
D) Not enough information to tell

Question

Quizplus · Accepted Answer

When similar bonds yield 10%, it means investors demand 10% return on their investment. Since the bond we are analyzing pays only 5%, it is less attractive to investors and the market value will have to decrease to bring its yield up to 10%. Based on the present value formula, we can calculate that the bond's market value is $886.07. Therefore, the answer is A, which states that the market value is less than $900.

A 10-Year Bond Pays 5% on a Face Value of $1,000