Question

A bond sold five weeks ago for $1,100. The bond is worth $1,050 in today's market....

A bond sold five weeks ago for $1,100. The bond is worth $1,050 in today's market. Assuming no changes in risk, which of the following is true?

a) Interest rates must be lower now than they were five weeks ago

b) The bond must be within one year of maturity

c) The face value of the bond must be $1100

d) The bond's current yield has increased from five weeks ago

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Answer #1

A bond sold five weeks ago for $1,100. The bond is worth $1,050 in today's market. Assuming no change in risk, the following sentence is true-

D) The bond's current yield has increased from five weeks ago.

As the current market price of the bond has reduced the yield to maturity for the bond should have increased. Bond's price and interest rate have an inverse relationship and hence as the bonds price has fallen, the interest rates must have increased. It is not necessary that the bond is sold at its face value nor can we judge anything about the maturity of the bond.

Do let me know in the comment section in case of any doubt.

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