A 15-year bond, purchased five years ago, has a $1,000 par value bond, a 10 percent coupon, and a yield to maturity of 12 percent. Interest is paid annually. The bond's price is

Question

Quizplus · Accepted Answer

The bond's price can be calculated using the present value of its future cash flows, which include the annual coupon payments and the par value at maturity. Given the bond has a 10% coupon on a $1,000 par value, it pays $100 annually. With 10 years remaining (since it was purchased 5 years ago and it's a 15-year bond), and a yield to maturity of 12%, the price is calculated as the present value of these cash flows. Using the formula for the present value of an annuity (for the coupon payments) and the present value of a lump sum (for the par value at maturity), the calculation is as follows:Price = (Coupon Payment / Yield to Maturity) * [1 - (1 / (1 + Yield to Maturity)^Remaining Years)] + (Par Value / (1 + Yield to Maturity)^Remaining Years)Price = ($100 / 0.12) * [1 - (1 / (1 + 0.12)^10)] + ($1,000 / (1 + 0.12)^10)Price = $887 (approximately)Therefore, the correct answer is B) $887.

A 15-Year Bond, Purchased Five Years Ago, Has a $1,000