Final answer:
The selling price of bonds with a face value of $528,000 and a quoted price of 104.25 is $550,620. Interest rate fluctuations affect bond prices; when market rates rise, existing bonds with lower rates sell at a discount and vice versa.
Step-by-step explanation:
The selling price of bonds can be calculated by multiplying the face value by the quoted price (represented as a percentage). In this case, bonds with a face value of $528,000 and a quoted price of 104.25 means the selling price is found by calculating 104.25% of $528,000.
To calculate the selling price: $528,000 × 104.25% = $528,000 × 1.0425 = $550,620.
Therefore, the selling price of the bonds is $550,620.
Impacts of Interest Rates on Bond Prices
Understanding the relationship between interest rates and bond prices is crucial for investors. When interest rates rise, newly issued bonds tend to have higher yields to attract investors, making existing bonds with lower interest rates less attractive. As a result, these existing bonds must be sold at a discount to offer a competitive yield.
Conversely, if interest rates fall, existing bonds with higher interest rates become more attractive and can often be sold at a premium, above their face value.
The hypothetical scenario described gives an example where a bond with an 8% coupon rate becomes less attractive when the general interest rates in the market rise to 12%.
The bond's price would need to drop below the face value to offer a yield that compensates for the lower interest rate, thus attracting investors despite the higher market interest rates. Similarly, a rise in the bond's quoted price above 100% signifies that it is selling at a premium, likely due to a drop in market interest rates since its issuance.