If you own a $1,000 face value bond with one year remaining to maturity and a 3 percent coupon rate and new bonds are paying 14 percent, what is the most you can get for your old bond today?

Question

Quizplus · Accepted Answer

The value of a bond is equal to the present value of its future cash flows. In this case, the bond has a face value of $1,000 and a 3% coupon rate, which means you will receive $30 in interest payments over the next year. The present value of these payments can be calculated using the current market interest rate of 14%.

PV = $30/(1 + 0.14) + $1,000/(1 + 0.14) = $26.32 + $877.19 = $903.51

Therefore, the most you can get for your old bond today is $903.51.

If You Own a $1,000 Face Value Bond with One