The next questions refer to the following.
A five-year bond is to be issued with a face value of $1,000 and a coupon rate of 5%.
-A potential buyer who demands a 9% rate of return would be willing to pay a price up to,but not more than

Question

Quizplus · Accepted Answer

To calculate the price that the buyer would be willing to pay, we need to use the present value formula:
PV = (C/r) * [1 - 1/(1+r)^n] + FV/(1+r)^n
where
PV = present value (what the buyer is willing to pay)
C = coupon payment = 5% * $1,000 = $50
r = rate of return demanded by the buyer = 9%
n = number of periods (years) = 5
FV = face value = $1,000

Plugging in the values, we get:
PV = ($50/0.09) * [1 - 1/(1+0.09)^5] + $1,000/(1+0.09)^5
PV = $844.41 (rounded to two decimal places)

Therefore, the best choice is C) $844.41.

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