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Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:

Respuesta :

Answer:

$875

Explanation:

Generally, the relationship can be expressed as interest rate = Coupon Payment / Face Value.

Initially a 7% market rate a investor gets 7% which gives a coupon payment of  $70 because the face value of 1000.

Hence 70/1000 = 7%

Subsequently with the interest rate change, we can look for the bond price.

Substitute 8% for the interest rate and find the revised bond value which will fall as rate increases

$70/bond price = 8%

Then $70/ bond price = 0.08

0.08 x bond price = $70

bond price = $70 / 0.08 = $875

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