What will happen to the bond''s price

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Reference no: EM131136320

a. Suppose a 10-year bond is to be issued at par, so its price is equal to its $100 face value. Suppose also that the prevailing rate of interest on the bond is 10 percent. How big would the bond's coupon have to be to induce people to hold it?

b. Now suppose that, just after this bond has been issued [its coupon is now fixed at the rate you found in part ( a )], interest rates on all 10-year bonds fall to 5 percent. What will happen to the bond's price? If you happened to be holding this bond, would this help you, hurt you, or not affect you at all?

Reference no: EM131136320

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