Suppose a bond is expected to be selling for $110 one year from now, its coupon payment during the year will be $10.75, and the interest rate, adjusted for the bond's risk, is 5%. If the bond market is efficient, what will be the current market price of the bond?

Question

Quizplus · Accepted Answer

The price of the bond can be calculated using the following formula:

Price of bond = (Coupon payment / (1 + interest rate)) + (Coupon payment / (1 + interest rate)^2) + ... + (Coupon payment + Face value / (1 + interest rate)^n)

Where n = number of years until maturity

In this case, n = 1 and we can substitute the given values to calculate the price:

Price of bond = (10.75 / (1 + 0.05)^1) + (110 / (1 + 0.05)^1)
Price of bond = 10.24 + 104.76
Price of bond = 115

Therefore, the current market price of the bond is $115. Answer choice C is correct.

Suppose a Bond Is Expected to Be Selling for $110