As we noted before, bonds carry an interest rate risk. For example, imagine you decide to buy a 10-year bond

for $1,000 that would pay an annual interest rate of 8%. Soon after you buy the bond, interest rates on bonds

rise, so that now similar companies are paying an annual rate of 12%. Anyone who buys a $1,000 bond now

can receive annual payments of $120 per year, but since your bond was issued at an interest rate of 8%, you

have tied up $1,000 and receive payments of only $80 per year. In the meaningful sense of opportunity cost,

you are missing out on the higher payments that you could have received. Furthermore, you can calculate the

amount you should be willing to pay now for future payments. To place a present discounted value on a future

payment, decide what you would need in the present to equal a certain amount in the future. This calculation

will require an interest rate. For example, if the interest rate is 25%, then a payment of $125 a year from now
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