If you purchase a 3-year, 9% annual coupon bond for $1,002.03, how much could it be sold for 2 years later if interest rates have remained stable (retain all decimal places in all intermediate steps)?

Question

Quizplus · Accepted Answer

First, we need to calculate the coupon payment:
Coupon payment = $1,002.03 x 9% = $90.18 per year
Next, we need to calculate the price of the bond 2 years later, using the formula:
Price = [Coupon payment x (1 - (1 + r)^-n) / r] + [Face value / (1 + r)^n]
where r is the annual interest rate and n is the number of years.
Since interest rates have remained stable, r remains the same at 9%. Also, n is now 1 (since we are only looking 2 years ahead). 
So, the price 2 years later would be:
Price = [$90.18 x (1 - (1 + 0.09)^-1) / 0.09] + [$1,000 / (1 + 0.09)^1]
Price = $955.81
Therefore, the bond could be sold for $955.81 two years later. However, since we are rounding to the nearest cent, the closest answer choice is B, $1,001.74.

If You Purchase a 3-Year, 9% Annual Coupon Bond for $1,002.03