Final answer:
An investor purchased a 20-year treasury note with a 6.05% interest rate. The yield on the bond is calculated by finding the difference between the face value and the purchase price divided by the purchase price. When interest rates rise, bonds previously issued at lower interest rates sell for less than face value, while those issued at higher interest rates sell for more.
Step-by-step explanation:
An investor purchased a 20-year treasury note with a 6.05% interest rate at an issue price of 104.5. The yield on the bond is calculated by finding the difference between the face value of the bond ($1,000) and the purchase price ($1,045), divided by the purchase price. In this case, the yield is 3.79%.
When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value. Conversely, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value. This is because investors will demand higher returns to compensate for the lower interest rate offered by the bond.
In the given example, if the interest rates had risen after the investor purchased the bond, the bond's market value would have decreased since its yield is lower compared to the current market rates.