One year before maturity,the price of a bond with a principal amount of $1,000 and a coupon rate of 5% paid annually fell to $981.The one-year interest rate must have

Question

Quizplus · Accepted Answer

When the price of a bond falls, its yield (interest rate) increases. In this case, since the bond is one year away from maturity, we can assume that the yield increase is driven by the one-year interest rate.

The formula to calculate the price of a bond is:

Price = (Coupon payment / (1 + r)^1) + (Coupon payment / (1 + r)^2) + ... + (Coupon payment + Principal / (1 + r)^n)

where r is the interest rate and n is the number of periods (in this case, n = 1).

Using the given information, we can set up the equation:

$981 = (50 / (1 + r)^1) + (50 / (1 + r)^2) + ... + (50 + 1000 / (1 + r)^1)

Solving for r using a financial calculator or spreadsheet, we get:

r ≈ 0.07 or 7.0%

Therefore, the answer is B) risen to 7.0%.

One Year Before Maturity,the Price of a Bond with a Principal