Question

When a $1000 bond is initially sold at 5 percent "coupon" yield for 30 years, $50 (.05 x $1,000) interest per year is paid to the buyer of the bond. However, if interest rates decrease to 4 percent for similar bonds issued later on, then the market price of the initial bond will _________________ ..

Answer 1

Increase.

Step-by-step explanation:

We know,

Coupon rate > yield to maturity = Premium or > Market price

Here,

Coupon rate = 5%

Interest rate or YTM = 4%

From the formula,

We can say that as the coupon rate is greater than YTM, the market price of a $1000 issued bond will be increased. We can say that the bond is selling at a premium price because the interest rate is decreasing.