A bond issued 10 years ago had a face value of $2,000; a coupon rate of 5%; and a yield of 6% when it was sold last month in the secondary bond market. At what price did the bond sell in the secondary market?

Question

Quizplus · Accepted Answer

The bond sold at a discount because its coupon rate (5%) was lower than its yield (6%). The price of the bond in the secondary market is calculated using the present value of its future cash flows (coupon payments and the face value at maturity). Given the yield of 6%, the price is calculated as the present value of the remaining coupon payments plus the present value of the face value, which results in $1,666.67.

A Bond Issued 10 Years Ago Had a Face Value