Question

Two years ago Sam bought a newly issued three-year US government bond (a risk-free asset) with a principle of $1000 and a 5% coupon rate. This year, one year before maturity, Sam decides to sell the bond and sees that the price people are willing to pay for his bond is now $1019.

Required:
a. Has the interest rate gone up or down since Sam purchased the bond?
b. What is the the current interest rate for bonds when Sam decides to sell?

Answer 1

Answer and Explanation:

In the case when sam purchased the bond, the rate of interest on the bond is

= 50 ÷ 1000

= 5%

Now, after the change in price, the interest rate is:

= 50 ÷ 1019

= 4.907%

a. So here the rate of interest is reduced or gone

b. And ,the current interest rate is 4.907%

so the same is to be considered and relevant