Consider a three-year bond with a principal amount of $5,000 and a 3% coupon rate paid annually. If this bond is sold one year from maturity, it will sell for _______(rounded to the nearest dollar) in the bond market, if current interest rates are 5%.

Question

Quizplus · Accepted Answer

The bond will sell for a price that equals the present value of its future cash flows, which include the final year's coupon payment and the principal repayment. The future cash flows are $150 (3% of $5,000) as the coupon payment and $5,000 as the principal repayment. Using a discount rate of 5% (the current interest rate), the present value calculation is: PV = $150 / (1 + 0.05) + $5,000 / (1 + 0.05) = $142.86 + $4,761.90 ≈ $4,905. This is rounded to the nearest dollar.

Consider a Three-Year Bond with a Principal Amount of $5,000