ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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It has increased
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It has decreased
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It has stayed the same
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None of the above
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Detailed explanation-1: -Answer: It will increase. Because Alex’s bond offers a higher return than the new bonds, others will want to buy it, leading its price to rise.
Detailed explanation-2: -Face value is equal to the dollar amount the issuer pays to the investor at maturity. As the bond’s price fluctuates, the price is described relative to the original par value, or face value; the bond is referred to as trading above par value or below par value.
Detailed explanation-3: -If inflation is increasing (or rising prices), the return on a bond is reduced in real terms, meaning adjusted for inflation. For example, if a bond pays a 4% yield and inflation is 3%, the bond’s real rate of return is 1%.
Detailed explanation-4: -The bond valuation formula is presented here: Price=(Coupon×1−(1+r)−nr)+Par Value(1+r)n Price = ( Coupon × 1 − ( 1 + r ) − n r ) + Par Value ( 1 + r ) n, where: Coupon is the cash flow received for each intermediate payment before the par value.
Detailed explanation-5: -What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%? The coupon rate remains at 8%. This is because the coupon rate is fixed.