You are thinking of buying a 10-year bond on the secondary bond market.The face value of the bond is $10,000,the interest rate is 5 percent (0.05)per year,and the bond was issued exactly eight years ago.What is the value of the bond today?

Question

Quizplus · Accepted Answer

To calculate the value of the bond today, we need to consider the remaining two years until maturity. We can use the present value formula to find the value of the bond today:

Present Value = Coupon Payment x (1 - (1 + r/2)^-n) / (r/2) + Face Value / (1 + r/2)^n

Where: 
Coupon Payment = $10,000 x 5% = $500
r = 5% / 2 = 2.5%
n = 2 x 10 = 20

Plugging in the numbers, we get:

Present Value = $500 x (1 - (1 + 2.5%/2)^-20) / (2.5%/2) + $10,000 / (1 + 2.5%/2)^20
Present Value = $9,070.30

Therefore, the value of the bond today is $9,070.30 (option B).

You Are Thinking of Buying a 10-Year Bond on the Secondary