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    Price of Bonds and Interest Rates Drop

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    Suppose two bonds (Bond P and Bond D) were issued five years ago when the interest rate was 9%. The coupon rate (annual payment) for Bond P and D were 9% and 5%, respectively. Now, with five years left in the bond's life, the interest rate drops to 7% per year. Show how bond price has been changed over time. If you are considering buying one of these bonds, which bond should be chosen and why?

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    Solution Summary

    This solution calculates price of bonds and the effect of a change in interest rate on the price of the bonds.