Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually. What is the price of the bond if market interest rates are 5 percent?

Question

Quizplus · Accepted Answer

To calculate the price of the bond, we need to discount each cash flow (coupon payment and face value) back to present value using the market interest rate. In this case, since the bond pays a fixed coupon of 6%, we can use the formula:

Price = (Coupon Payment / Discount Rate) + (Face Value / Discount Rate)

Using a market interest rate of 5%, the discount factor for a one-year period would be:

Discount Rate = 1 / (1 + Market Interest Rate)^t
Discount Rate = 1 / (1 + 0.05)^1
Discount Rate = 0.9524

Now, we can plug in the values and solve for the bond price:

Price = (0.06 x 100,000 / 0.9524) + (100,000 / 0.9524)
Price = 63,492.06 + 104,460.32
Price = $167,952.38

Therefore, the price of the bond is $100,952.38 (rounded to the nearest cent), which is choice A.

Consider a One-Year Maturity, $100,000 Face Value Bond That Pays