Other things being equal, what happens to the current price of a bond if the bond...
Other things being equal, what happens to the current price of a bond if the bond has a larger par value?
Decrease.
Increase.
No change.
Cannot be determined without knowing the market interest rate.
Homework Answers
Other things being equal, the current price of a bond will increase if the bond has a larger par value
Therefore, correct answer is option: Increase
The Bond’s price can be calculated the help of following formula and we can see that the par value of the bond is directly correlated with the price of the bond. Therefore, if par value is larger, the price of a bond will increase.
Bond price P = C* [1- 1/ (1+i) ^n] /i + M / (1+i) ^n
Where,
M= Par value or face value of the Bond
P= Current price of the bond
C = coupon payment or annual interest payment
n = Time period to maturity
i = yield to maturity or priced to yield (YTM)
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