Jack purchased a new bond of the Candlestick Corporation for its face value of $1,000. The bond has a coupon rate of 3.5%, makes semiannual interest payments, and matures in fifteen years. A year after purchasing the bond, Jack needs to sell the bond to offset some major expenses he incurred when his home caught on fire. Interest rates in the economy at this time have fallen to 3.0%.
Given this scenario, when Jack sells the bond, he can expect to receive which of the following?
- more than what he originally paid for the bond.
- less than what he originally paid for the bond.
- exactly what he paid for the bond.
- $965, which is what he paid for the bond less the $35 in interest he received during his year of owning the bond.
Answer(s): A
Explanation:
Since interest rates in the economy have decreased, Jack can expect to receive more than what he originally paid for the bond. Bond prices move inversely with interest rate changes, all else equal.
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