A decade ago, Monty purchased a 30 year, $1,000 Treasury bond. The interest rate at the time
Question:
A decade ago, Monty purchased a 30 year, $1,000 Treasury bond. The interest rate at the time of purchase was 7%. Today, comparable bonds are paying 5%. Approximately how much could Monty sell his bond for? Explain why the bond has increased in value.
Step by Step Answer:
You would sell the bond for a premium more than face value bec...View the full answer
Personal Finance Building Your Future
ISBN: 978-0073530659
1st edition
Authors: Robert B. Walker, Kristy P. Walker
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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