Question

When k is 5%, the price of the KLM bond is $1,045. However, when k rises to 6%, the price of the KLM bond drops to $907. Here, k represents the discount rate or yield-to-maturity, and changes in this rate significantly impact the bond's market price. As the discount rate increases, the bond's price decreases, and conversely, as the discount rate decreases, the bond's price increases. This relationship between yield-to-maturity and bond price is a fundamental concept in fixed-income investments.

Answer 1

When the bond's interest rate is less than the market interest rate, the bond becomes less attractive to investors. To induce investors to buy the bond, the bond seller will lower its price below its face value. In this case, the bond price would not exceed $964.

Step-by-step explanation:

When the bond's interest rate is less than the market interest rate, the bond becomes less attractive to investors. To induce investors to buy the bond, the bond seller will lower its price below its face value. In this case, since interest rates are now 12% and the expected payments from the bond one year from now are $1,080, you could invest $964 in an alternative investment and receive $1,080 a year from now. Therefore, you will not pay more than $964 for the original $1,000 bond.