Final answer:
The spread per $1,000 face value of a GNMA pass-through security quoted from 98.10 to 98.18 is $0.80. Interest rates affect bond prices inversely; if they rise, the bond's price falls to ensure its yield remains competitive. An 8% bond would likely be priced below face value if market rates rise above the coupon rate.
Step-by-step explanation:
A GNMA (Government National Mortgage Association) pass-through security is quoted at 98.10 to 98.18. The quote represents the price as a percentage of the face value, which is typically $1,000 for bonds and similar financial instruments. The spread between 98.10 and 98.18 is a difference in the price representing how much more one would pay at the high end of the quote compared to the low end.
If we calculate the spread on a per $1,000 face value basis, this would be:
98.18 - 98.10 = 0.08
0.08% of $1,000 is equal to $0.80.
Therefore, the spread per $1,000 face value of a GNMA pass-through security quoted from 98.10 to 98.18 is $0.80.
Interest rates have a direct impact on the price of bonds. If interest rates rise, the price of the bond falls to compensate for the lower yield compared to the new higher-yielding investments in the market. Conversely, if interest rates fall, the price of the bond may rise above its face value as it offers a better return than what's available from new investments. For an 8% bond with one year left to maturity, if the interest rates rise to 12%, you wouldn't pay more than $964 for it since you could invest $964 in an alternative investment yielding 12%, accumulating to $1,080 in a year.