1,500 $ is the appoximate market value of a bond that pays $60 interest each year if interest rates have dropped to 4 percent.
Bond Value -
- Bond value would be determined according to the series of interest payments in the future and the lump sum of face value at the maturity.
- Note that, bond value and market interest rate would have a n inverse relationship.
Should I buy bonds when interest rates are low?
- When all other factors are equal, as interest rates go up, bond prices go down.
- The reason for this inverse relationship is that when interest rates increase, new bonds offer higher coupon payments.
- Existing bonds with lower coupon payments must decline in price in order to be worthwhile investments to would-be buyers.
This bond would represent the characteristics of a perpetuity.
PMT/ I = $60/4% = 1,500 $
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