Final answer:
The statement that interest rates for bonds remain the same throughout the year is false. Market interest rates influence bond prices, causing them to fluctuate to remain competitive investments. Therefore, the price of a bond can change to reflect current market conditions and the present value of its future payments.
Step-by-step explanation:
The statement that interest rates remain the same percentage no matter how many times you pay it for a bond during one year is false. Interest rates that are quoted for bonds are typically annual rates, but the actual payments can vary depending on the bond's terms, such as being semi-annual, quarterly, or monthly. However, real-world calculations for bond pricing are more complex due to the changing market conditions and risks associated with the borrower's ability to repay.
When considering a bond’s value, it’s important to understand that its price is determined by the present value of future expected payments. If market interest rates rise, new bonds are issued at these higher rates, which make existing bonds with lower rates less attractive. Consequently, to attract buyers for a lower rate bond when market rates are higher, sellers might lower the bond's price. The inverse is also true; if market rates fall, existing bonds with higher rates become more attractive and can often command a price premium.
As an example, if you were looking to purchase a $10,000 10-year bond that pays 6% interest annually one year before its maturity, but the current market rates are 9%, you would expect to pay less than $10,000 for this bond due to the relatively unattractive lower interest rate in the current higher-rate market environment.