Sydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually.One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market.What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 5% coupon rate?

Question

Quizplus · Accepted Answer

The bond will be sold at a price that reflects the present value of the remaining cash flows, which is the final coupon payment and the principal. Since the market rate is 5%, the bond's price will be higher than its face value because its coupon rate is higher. The price is calculated as $600 / (1 + 0.05) + $10,000 / (1 + 0.05) = $10,095.

Sydney Purchases a Newly Issued, Two-Year Government Bond with a Principal