Question

Kim currently holds a 10-year, 8% coupon U.S. Treasury bond that she bought last week. If U.S. Treasury bond interest rates go up to 9%, what will happen to the price of Kim's bond?

Answer 1

Interest rates and bond prices have an inverse relationship. So, if interest rates go up, bond prices move down and vice - versa. Therefore, in our case, since interest rates have gone up, Kim's bond will go down. Also, you might wanna note that the interest rates have increased more than the coupon rate of 8%. When interest rate > Coupon rate, bonds trade at a discount and when interest rates < coupon rate, bonds trade at a premium. Therefore, now, the bond would be trading below the par value.