finance question

Question

You currently own a 30 year Treasury Bond at 4% interest, paid semiannually. The market interest rates for like securities rose to 5%. Would your bond sell for a premium or a discount? Why? What would the market value of your bond be? show work

Answer 1

If investors can invest their money at 5%, they will not be interested in your bond at face value because they would earn only 4 percent. So to sell your bond it would have to be offered at less than face value. Investors will bid for your bond to the point where the price they are willing to pay will give them a 5% return. Your bond will sell at a discount

 

bond values and interest rates move in opposite directions. If the interest rate in the market dropped to 3%, everyone would be happy to pay you face value for your 4% bond, but you would be able to sell it at more than face value because it would be in high demand at face value. Thee price would rise, i.e. a premium would develop, and the bond would be bid up to the point where the price yields 3%.