Question

A company previously issued​ 5% bonds with​ semi-annual payments​ (and a face value of​ $1,000). Since​ then, interest rates have risen​ (gone up) substantially. Which of the following is the most likely current price for the​ bonds?

A. ​$894.50 B. ​$1,000.00 C. ​ $1,129.27 D. All of these are equally likely.

Answer 1

  

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If the interest rates have increased substantially, i.e. the rate has gone more than the coupon rate. The Bond will trade at the value below PAR.

Therefore the most likely price after rate increase is 894.50 which is below PAR.

Option A is correct,

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