Isabella buys a $1,000 bond that matures in 10 years (that is, she lends $1,000

Question

Isabella buys a $1,000 bond that matures in 10 years (that is, she lends $1,000 to the U.S. Treasury for 10 years). The bond pays her $50 every year for 10 years. When the bond matures at year 10, she will receive her $1,000 back as well as her last interest payment of $50.

4.2. Suppose that if interest rates stay at 5%, Isabella can sell her bond for $1,000. But now the U.S. Treasury issues new 10-year bonds that pay 10% interest every year for 10 years. If Isabella tries to sell her existing bond, then the price of Isabella's existing bond will _____.


A. Remain at $1,000

B. Increase above $1,000

C. Decrease below $1,000

Explanation / Answer

It's likely C because she can get less if I can pay $1,000 for this new bond that pays me more interest. Reasons it might not be: there is a Maturity Risk Premium associated with the new bonds the new bonds are selling at above par

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.