math 9

December 18, 2020


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.