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

If interest rates fall to 5% the day after Judy Johnson purchases her Treasury note, the value of the bond will increase. This is because bonds and other fixed-income securities act inversely with respect to changes in market interest rates; when rates go down, prices of existing bonds go up. The decrease in interest rate will reduce the yield on a new bond issued at that rate and therefore make an existing higher yield bond 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). This results in a current yield of 0.5060%. Taking this figure and substituting it into our equation for bond price (CP = C/[1 + YTM]T) we can estimate how much her bond is worth now:

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

CP = $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 is important to note however that further changes in interest rate may cause fluctuations in price; investors should take into account any potential future alterations when making decisions about such investments going forward