Consider a three-year bond with a principal amount of $5,000 and a 4% coupon rate paid annually. If this bond is sold one year from maturity, it will sell for _________ (rounded to the nearest dollar) in the bond market if current interest rates are 5%.

Question

Quizplus · Accepted Answer

The bond will sell for a price that equals the present value of its future cash flows, which include the final year's coupon payment and the principal repayment. The coupon payment is $5,000 * 4% = $200. The cash flows in one year will be $200 (coupon) + $5,000 (principal) = $5,200. Discounting this back to the present value at the current interest rate of 5% gives: $5,200 / (1 + 0.05)^1 = $4,952 (rounded to the nearest dollar).

Consider a Three-Year Bond with a Principal Amount of $5,000