A bond with a coupon rate of 6%,paid quarterly,and 5 years to maturity is being offered in the market.If bonds with similar risks are currently being paid 3%,what is the price you would pay for this bond?

Question

Quizplus · Accepted Answer

To calculate the price of the bond, we need to discount all the future cash flows (coupons and principal) at the current market rate of 3%.

N = 5 x 4 = 20 (total number of coupon payments)
I/Y = 3/4 = 0.75% (quarterly rate)
PV = ?
PMT = 6%/4 x $1,000 = $15 (quarterly coupon payment)

Using the financial calculator, we can solve for PV:
PV = $1,139.49

Therefore, the price you would pay for this bond is $1,139 (choice B).

A Bond with a Coupon Rate of 6%,paid Quarterly,and 5