A three-year bond with a principal amount of $5,000,a 4% 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 find the price of the bond, we need to use the formula:
Bond price = (Coupon payment / Interest rate) * (1 - 1 / (1 + Interest rate) ^ Number of years) + Principal / (1 + Interest rate) ^ Number of years

Coupon payment is $200 (4% of $5,000), interest rate is 5%, number of years is 2 (since the bond has one year left until maturity), and principal is $5,000. Plugging in these values, we get:
Bond price = (200 / 0.05) * (1 - 1 / 1.05 ^ 2) + 5,000 / 1.05 ^ 2
Bond price = $4,952.56
Rounding to the nearest dollar gives us Choice B as the correct answer.

A Three-Year Bond with a Principal Amount of $5,000,a 4