If you own a $1,000 face value bond with one year remaining to maturity and a five percent coupon rate and new bonds are paying 12 percent, what is the most you can get for your old bond?

Question

Quizplus · Accepted Answer

The most you can get for your old bond is determined by comparing the coupon rate to the current market interest rate. If new bonds are paying 12 percent and your bond is only paying 5 percent, then it is worth less than its face value. To solve for the most you can get, calculate the present value of the bond using the current market interest rate of 12 percent:

PV = $50 / (1 + 0.12) + $1,000 / (1 + 0.12)^1 = $937.50

Therefore, the best choice is C, which is the closest to the calculated present value.

If You Own a $1,000 Face Value Bond with One