Samantha buys a bond in the amount of $1,000 with a promised interest rate of 18 percent.If the market interest rate decreases to 3 percent,Samantha can sell his bond for up to

Question

Quizplus · Accepted Answer

When the promised interest rate of the bond is 18%, the bond's selling price would be:
Selling price = $1,000 + ($1,000 x 18%) = $1,000 + $180 = $1,180

However, if the market interest rate decreases to 3%, the bond's selling price would increase because the bond's promised interest rate of 18% is higher than the market interest rate of 3%. To calculate the bond's selling price at 3% market interest rate, we need to find the bond's new yield to maturity (YTM) and discount the bond's future cash flows (interest payments and principal repayment) at that rate.

Using financial calculators or Excel functions, we can find that the YTM of the bond is approximately 3.5%. Therefore, the bond's selling price would be:
Selling price = $1,000 x (1 + 3.5%)^n + $180 x (PVIF 3.5%, n) = $6,028.36
where n is the number of periods until maturity (assuming it's a long-term bond).

Therefore, Samantha can sell his bond for up to $6,028.36, which is higher than any of the other answer choices.

Samantha Buys a Bond in the Amount of $1,000 with a Promised