Suppose a Canada Savings Bond will mature in 4 years.If the bond pays a coupon of $200 per year and will make a final par value payment of $5000 at maturity,what is its price if the relevant market interest rate is 3%?

Question

Quizplus · Accepted Answer

The correct answer is A because the price of the bond is the present value of the future cash flows, which are the annual coupon payments and the final par value payment. The present value of the annual coupon payments is $200/(1+0.03)^1 + $200/(1+0.03)^2 + $200/(1+0.03)^3 + $200/(1+0.03)^4 = $744.09. The present value of the final par value payment is $5000/(1+0.03)^4 = $4441.76. Therefore, the price of the bond is $744.09 + $4441.76 = $5185.85.

Suppose a Canada Savings Bond Will Mature in 4 Years