If you own a $1000 face value bond with 1 year remaining to maturity and a 3 per cent interest rate,and new bonds are paying 14 per cent,what is the most you can get for your old bond?

Question

Quizplus · Accepted Answer

The bond's current value can be calculated using the formula:

Bond value = (coupon payment/interest rate) x [1 - (1/1+interest rate)^years to maturity] + (par value/1+interest rate)^years to maturity

Using the given information, we get:

Bond value = (30/0.03) x [1 - (1/1.03)^1] + (1000/1.03)^1
Bond value = 1000.91

Therefore, the maximum amount you can get for your old bond is less than its current value, which is $1000.91. The actual value would be even lower due to other factors such as the bond's credit rating and market conditions. The closest option is A) $903.51, which is a reasonable estimate.

If You Own a $1000 Face Value Bond with 1