Rommel buys a bond in the amount of $2,000 with a promised interest rate of 17 percent.If the market interest rate increases to 27 percent,Rommel can sell her bond for up to

Question

Quizplus · Accepted Answer

To find the maximum amount that Rommel can sell her bond for, we need to calculate the bond's present value at a market interest rate of 27 percent. Using the present value formula, we get:

Present value = Coupon payment / (Interest rate - Market interest rate) + Face value / (1 + Market interest rate)^n

where n is the number of periods until the bond matures.

Plugging in the values, we get:

Present value = 0.17 x 2,000 / (0.17 - 0.27) + 2,000 / (1 + 0.27)^1
Present value = 340 / (-0.1) + 1,568.97
Present value = -3,400 + 1,568.97
Present value = -1,831.03

Since the present value is negative, Rommel cannot sell her bond for more than its face value. Therefore, the maximum amount she can sell her bond for is its face value of $2,000.

Out of the answer choices given, the closest to the face value is $1,259.26 which is less than the face value, therefore, the best choice is A.

Rommel Buys a Bond in the Amount of $2,000 with a Promised