What would be the value of this bond if interest rates fall to 5% the day after it is purchased?

Bonds will gain value if the interest rate falls to 5% on the same day that Judy Johnson purchased her Treasury Note. It is due to the fact that bonds, fixed-income investments and other securities are inversely related to interest rate fluctuations. As rates decrease, bond prices increase. This is because a decrease in market interest rates will lower the yield for a newly issued bond at that rate. Therefore, an existing high yield bond becomes more attractive.

To determine how much the price of Judy’s bond has increased we must first calculate its current yield, which is calculated by dividing its coupon payment (5.06%) by its par value (1000). It gives a yield of 0.5060%. This figure is substituted into the equation of bond price.[1 + YTM]You can use the following formula to estimate her bond value:

CP = 1000*(5.06/100) / [1+(0.5060/100)]5

The CP is $1028.70

Now if we substitute 5% for YTM our hypothetical new price comes out as 1046 – an increase of 17.7 over initial purchase cost.

It’s important to remember that future interest rate changes may lead to price fluctuations. Investors will need take this into consideration when making any decisions regarding such investments in the future.