A bond which pays a 12% coupon annually with a par of $1,000 matures in five years with a yield to maturity of 10%. If the bond currently sells for $1,085, what is its net present value?

Question

A bond which pays a 12% coupon annually with a par of $1,000 matures in five years with a yield to maturity of 10%.  If the bond currently sells for $1,085, what is its net present value?

Quizplus · Accepted Answer

To find the net present value, we need to calculate the present value of all future cash flows and subtract the initial investment (cost of the bond). We are not given the cash flows, but since the bond is selling at a premium ($1,085), we know that the coupon rate is lower than the market interest rate. This means that the bond's yield to maturity is lower than the current market rate. Therefore, the bond's net present value should be less than its purchase price. The closest answer choice to this is C, which is $9.18.

A Bond Which Pays a 12% Coupon Annually with a Par