If you own a $1000 face value bond with one year remaining to maturity and a five per cent interest rate, and new bonds are paying 12 per cent, what is the most you can get for your old bond?
A)$1120
B)$1000
C)$937.50
D)impossible to determine without additional information

Question

Quizplus · Accepted Answer

Since the bond is only one year away from maturity, it is essentially a one-year, five per cent bond. To calculate the new price of the bond, we need to discount the remaining payments at the current market rate of 12 per cent. Using the formula for present value of a single sum, we get:

PV = FV / (1 + r)^n
PV = 50 / (1 + 0.12)^1
PV = $44.64

Adding the discounted interest payment of $50 to the discounted principal of $944.64 gives a total value of $994.64, which is the most you can get for your old bond. However, this assumes no transaction costs or other factors that may affect the price. Therefore, the closest answer choice is C) $937.50.

If You Own a $1000 Face Value Bond with One