payments from the bond one year from now are $1,080, because in the bond’s last year the bond's issuer

will make the final interest payment and then also repay the original $1,000. Given that interest rates are

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17.2 • How Households Supply Financial Capital 417

now 12%, you know that you could invest $964 in an alternative investment and receive $1,080 a year from

now; that is, $964(1 + 0.12) = $1080. Therefore, you will not pay more than $964 for the original $1,000

bond.

4. Consider that the investor will receive the $1,000 face value, plus $80 for the last year’s interest payment.

The yield on the bond will be ($1080 – $964)/$964 = 12%. The yield, or total return, means interest

payments, plus capital gains. Note that the interest or coupon rate of 8% did not change. When interest rates

rise, bonds previously issued at lower interest rates will sell for less than face value. Conversely, when
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