A $1,000 bond, which matures in one year, has a price of $925. The interest rate on this bond is

Question

Quizplus · Accepted Answer

The formula for the price of a bond is:

Price = (Annual Coupon Payment) / (1 + Interest Rate) + (Annual Coupon Payment) / (1 + Interest Rate)^2 + ... + (Annual Coupon Payment + Face Value) / (1 + Interest Rate)^n

where:
- Annual Coupon Payment = the total amount of interest paid annually
- Face Value = the amount paid at maturity
- Interest Rate = the required rate of return for a bond of similar risk
- n = the number of years to maturity

Since the bond in the problem has a maturity of one year, the formula simplifies to:

Price = Annual Coupon Payment / (1 + Interest Rate) + Face Value / (1 + Interest Rate)

We're given that the bond has a face value of $1,000, a price of $925, and a maturity of one year. We don't know the coupon payment or the interest rate, so we'll have to solve for the interest rate. Plugging in the numbers we know, we get:

$925 = Coupon Payment / (1 + Interest Rate) + $1,000 / (1 + Interest Rate)

Solving for Interest Rate, we get:

Interest Rate = 8.11%

Therefore, the answer is choice B.

A $1,000 Bond, Which Matures in One Year, Has a Price