You own a corporate bond which has a face value of $1000 and an 8% annual coupon interest rate; when originally issued, it had a 20 year maturity and was sold for $1000. The bond pays interest semi-annually and will mature in 17 years. Market interest rate on this bond is currently 6% (an annual rate). Assuming that interest rats don’t change, what would you expect the bond's price to be three years from now?
2007-03-06 03:48:23 · 1 answers · asked by Anonymous in Business & Finance ➔ Other - Business & Finance
At maturity, this bond will be redeemed for $1,000
Until that time it's price will go up and down on the trading market based on the prevailing interest rate of the day, and how long it is to "Maturity"
If interest rates are lower now than the coupon rate, the value of the bond will be higher than $1,000
If in the future ,if interest rates go up above the coupon rate, the trading value of the bond will be less than $1,000
But remember, there is a long time left before the redemption of the bond, so time element will affect the pricing as well,
People are trying to buy bonds to lock in an interest rate, and hope that rates will go down so they can sell the bond at a higher price...The longer the bond will trade, the more likely a scenerio for gain will happen. So this plays a factor.
But no matter what, At redemption, the bond will give you $1,000
But until then, it is only worth what someone is willing to pay you for it.
2007-03-06 04:18:55 · answer #1 · answered by bob shark 7 · 0⤊ 0⤋