Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually.What is the price of the bond if market interest rates are 7 percent?
A)$99,050.15.
B)$99,457.94.
C)$99,249.62.
D)$100,000.00.
E)$99,065.42.

Question

Quizplus · Accepted Answer

To calculate the price of the bond, we need to discount the future cash flows of the bond using the market interest rate of 7 percent. Since the bond pays a fixed coupon annually, the cash flow for the first year will be $6,000 (6% of $100,000 face value). Using the formula for present value of a single cash flow: PV = CF/(1+r), where PV is the present value, CF is the cash flow, and r is the discount rate, we get:

PV = $6,000/(1+0.07) = $5,607.48

At maturity, the bond will also pay back the face value of $100,000. Using the formula for present value of a lump sum payment: PV = FV/(1+r)^n, where FV is the future value, n is the number of periods, and r is the discount rate, we get:

PV = $100,000/(1+0.07)^1 = $93,641.14

Therefore, the total price of the bond is the sum of the two present values:

Price = $5,607.48 + $93,641.14 = $99,248.62

The closest answer choice to this value is C: $99,249.62.

Consider a One-Year Maturity, $100,000 Face Value Bond That Pays