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If a bond was bought in 1995 for $1,000 and it was sold in 2008 for...

If a bond was bought in 1995 for $1,000 and it was sold in 2008 for $850, what may have caused the price of the bond to go down? Explain

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Answer #1

For a bond, market interest rates and price of a bond are inversely related. There can be three scenario's -

1) Interest Rate = Coupon Rate, Price = Par Value

2) Interest Rate > Coupon Rate, Price < Par Value

3) Interest Rate < Coupon Rate, Price > Par Value

In this question the bond was purchased when the interest rate was equal to the coupon rate as price of the bond is equal to its face value and sold when interest rate was greater than the coupon rate as the price of the bond was less than the par value.

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