Question

Imagine that a local water company issued $10,000 ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%.

Given the change in interest rates, would you expect to pay more or less than $10,000 for the bond?
Calculate what you would actually be willing to pay for this bond.

Answer 1

Step-by-step explanation:

The $10,000 is the face value of the bond. Using a financial calculator, input the following to calculate the price at a year before maturity; i.e. at year 9;

Time to maturity; N = 10 - 9 = 1

Annual interest rate; I/Y = 9%

Annual coupon payment; PMT = 0

Face value of the bond; FV = 10,000

then compute present value ; CPT PV = $9,174.31

Therefore, you will pay less than $10,000 for the bond and the price would be as above $9,174.31