A three-year bond with a principal amount of $5,000,a 3% coupon rate paid annually,one year from maturity will sell for what price (rounded to the nearest dollar)in the bond market if interest rates are 5%?

Question

Quizplus · Accepted Answer

To calculate the bond price, we need to use the present value formula:
Bond price = (annual coupon payment / (1 + interest rate)^1) + (annual coupon payment / (1 + interest rate)^2) + (annual coupon payment + principal amount / (1 + interest rate)^3)

Plugging in the values:
Bond price = (0.03 x 5000 / (1 + 0.05)^1) + (0.03 x 5000 / (1 + 0.05)^2) + (0.03 x 5000 + 5000 / (1 + 0.05)^3)
Bond price = 149.77 + 142.25 + 4807.98
Bond price = $4,900.

Rounding it to the nearest dollar, we get the answer as B: $4,905.

A Three-Year Bond with a Principal Amount of $5,000,a 3