Question

If you purchase for $1,000 a bond that pays $40 annually to the holder, and then "the" (that is, the market) interest rate rises to 8 percent, the price of that bond would now be:

Answer 1

Generally when interest payments increases, bond prices falls

Step-by-step explanation:

If you purchase for $1,000 a bond that pays $40 annually to the holder, and then "the" (that is, the market) interest rate rises to 8 percent, the price of that bond would now be the present value of the future payments

Assume that the bond will last for 3 years to maturity

Interest payments at $40 = Total of $120 for 3 years

Interest payments at $80 = Total of $240 for 3 years

The additional interest payment from the growth will adjusted against the bond value of $1000 which will then be $1000 - (240 - 120). The bond price will fall to $880

Generally when interest payments increases, bond prices falls