You can make money and lose money in bonds if the market interest rate changes.
The bond price will go down if the market interest rate goes up. The bond will sell at a
discount.
The equations to calculate discount is as follows:
Bond payment = (face value) ´ (coupon rate)
Bond payment fixed = (bond price new)
´ (interest rate new)
 
John buys a $1,000 bond at a 10% coupon rate. If the market interest rate goes up to 12.5%
for how much can he sell the bond?
Bond payment = 1,000 ´ 0.1 = $100
Bond payment fixed
= (bond price new) ´
(interest rate new)
$100 = bond price new * 0.125
thus,
bond price new = $100/0.125
= $800
John will sell the bond at a discount and lose $200.
Pat paid $900 for a bond with a face value of $1,000, a 5% coupon rate, and a maturity of
one year. What is the rate of return of Pat's investment?
Estimate the answer:
 Less than 5%
Between 5% and 10%
 Over 10%
 
|
