A bond has a face value of $1,000, coupon rate of 8%, and matures in 6...

60.1K

Verified Solution

Question

Finance

A bond has a face value of $1,000, coupon rate of 8%, andmatures in 6 years. Imagine that the market interest rate is 6%,but immediately after you buy the bond the rate drops to 5%. Whatis the immediate effect on the bond price?
Hint: the effect is the price of the bond after the change minusthe price of the bond before the change.

Answer & Explanation Solved by verified expert

4.3 Ratings (787 Votes)

The current market price of these bond if the market rate is 6 The Current Market Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value Face Value of the bond 1000 Annual Coupon Amount 80 1000 x 8 Annual Yield See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

A bond has a face value of $1,000, coupon rate of 8%, andmatures in 6 years. Imagine that the market interest rate is 6%,but immediately after you buy the bond the rate drops to 5%. Whatis the immediate effect on the bond price?Hint: the effect is the price of the bond after the change minusthe price of the bond before the change.