The interest rate on one-year risk-free bond is 5%. BAC company has issued a 5% coupon bond with a face value of $1,000, maturing in one year. If the bond is considered risk-free, what is the price of the bond?

Question

Quizplus · Accepted Answer

Since the bond is considered risk-free, its price should be equal to its present value of its future cash flows, which is simply its face value plus the coupon payment.

PV = (Coupon Payment/1-year interest rate) + Face Value

PV = ($50/0.05) + $1,000

PV = $1,050

However, the question states that the bond is considered risk-free, which means that its price should be equal to the price of the risk-free bond, which is also 5%. Therefore, the price of the bond is actually $1,000, not $1,050.

The Interest Rate on One-Year Risk-Free Bond Is 5