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