$.$Interest rate risk is the risk that interest rates will

and bond prices will

$,$ thereby lowering the prices on older bond issues and

ensuring that an older bond and a newly issued bond offer investors approximately the same yield. Bonds generally have a

value.

Suppose you own a $30-$year bond issued by Horseshoe Farm Equipment with a face value of $$1,000$ paying a semiannual coupon interest rate of $4\%$

that has $15$ years remaining until maturity. If interest rates in the general economy jump to $6\%$ after one year, no one will want to buy your $4\%$ bond

for $$1,000,$ because it pays only $

per year in interest. If you want to sell the bond, then the bond price will have to be

If rates on similar bonds are now at $6\%,$ then the discount rate is $6\%($or $3\%$ twice a year for $30$ payments$).$ The task is to calculate the present value

of the interest payments and the repayment lump sum. To do so$,$ use Appendix A$-2$ and Appendix A$-4$ in your textbook. Find the column for $3\%$

interest and the row for $30$ periods. $($The number of periods, $n,$ is equal to $30,$ because there are $30$ semiannual interest payments in the remaining $15$

years until the bond matures.$)$

You can use the following equation to determine the value of a bond $($or bond selling price$)$:

The Value of Bond $($Bond Selling Price$)$ Formula

$)i,n)2)i,n$