
You can make money and lose money in bonds if the market
interest rate changes. The bond price will go up if the market
interest rate comes down. The bond will sell at a premium.
The equations to calculate premium is as follows:

Bond payment = (face value) ´
(coupon rate)
Bond payment fixed = (bond
price new) ´ (interest rate new)
 
Mary buys a $1,000 bond at a 10% coupon rate. If the market
interest rate goes down to 8%, for how much can she sell the
bond?

Bond payment = 1,000 ´ 0.1 =
$100
Bond payment fixed
= (bond price new) ´ (interest rate new)
$100 = bond price new
´ 0.08
thus,
bond price new= $100/0.08
= $1,250
Mary will sell the bond at a premium and make a profit of
$250.

Tom paid $10,200 for a bond with a face value of $10,000, a coupon
rate of 12%, and one year to maturity. How much money will
Tom make?
Estimate the answer:
Less
than $600
Between $600 and $1,100
Over
$1,100


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