An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4 percent and the bond is being offered for sale at a price of $9400. The analyst should recommend

Question

Quizplus · Accepted Answer

To determine whether or not the purchase of the bond is profitable, we need to calculate the present value of the bond using the market interest rate of 4 percent.

PV = FV / (1 + r) 
PV = $10,000 / (1 + 0.04) 
PV = $9,615.38

Since the bond is being offered for sale at a price of $9,400, the purchase price is less than its present value. Therefore, buying the bond would be profitable, as the investor would receive $10,000 in one year's time for an initial investment of $9,400.

Option A is not correct, as the investor would not earn an additional $224 by investing the $9,400 elsewhere in one year, as the interest rate is only 4 percent.

Option B is not correct, as the purchase price being greater than its present value would make buying the bond unprofitable.

Option C is not correct, as the purchase price being less than its present value would make buying the bond profitable.

Option E is not correct, as the investor would not earn an additional $376 by investing the $9,400 elsewhere in one year, as the interest rate is only 4 percent.

An Analyst Is Considering the Purchase of a Government of Canada