Last year,Danielle bought a bond for $1,000 that promises to pay $115 a year.This year,a person who buys a bond for $1,000 receives $120 a year.If Danielle were to sell her (old)bond,its price would be approximately

Question

Quizplus · Accepted Answer

The value of a bond is inversely related to the prevailing interest rates. As interest rates increase, the value of an existing bond decreases. In this case, since interest rates have increased, the value of Danielle's old bond has decreased. To calculate the current value of the bond, we need to calculate the present value of the future cash flows. Using a discount rate of 12% (the market rate for bonds of similar credit risk and maturity), we can calculate the present value of the old bond's cash flows as follows:

PV = (115/1.12) + (115/1.12^2) + (115/1.12^3) + ... = 938.41

Therefore, the approximate price of Danielle's old bond would be $958, which is less than the face value of $1,000.

Last Year,Danielle Bought a Bond for $1,000 That Promises to Pay