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math 9

December 18, 2020
Bonds

 

There is an inverse relationship between bond prices and yields. This inverse relationship will be demonstrated by calculating bond prices to show that interest rates move inversely: if yields rise, then bond prices fall.  Bonds will be sold either at a premium or a discount. With this in mind respond to the following question.

You currently own a 30 year Treasury Bond at 4% interest, paid semiannually. The market interest rates for like securities rose to 5%. Would your bond sell for a premium or a discount? Why? What would the market value of your bond be? Prove your answer by showing your work.