Ralph purchases a newly-issued,two-year government bond with a principal amount of $10,000 and a coupon rate of 7% paid annually.One year before the bonds matures (and after receiving the coupon payment for the first year),Ralph sells the bond in the bond market.What price (rounded to the nearest dollar)will Ralph receive for his bond if the prevailing interest rate is 8%?

Question

Quizplus · Accepted Answer

To calculate the price Ralph will receive for his bond, we can use the formula:

Bond price = (Annual coupon payment / Current yield) x (1 - 1 / (1 + Current yield)^n) + (Principal amount / (1 + Current yield)^n)

Where:
- Annual coupon payment = Principal x Coupon rate = $10,000 x 7% = $700
- Current yield = 8%
- n = number of years remaining until maturity = 1

Plugging in the values, we get:

Bond price = ($700 / 0.08) x (1 - 1 / 1.08^1) + ($10,000 / 1.08^1) = $9,907

Therefore, Ralph will receive $9,907 for his bond if he sells it one year before maturity. The best choice is B.

Ralph Purchases a Newly-Issued,two-Year Government Bond with a Principal Amount