If you own a $1,000 face value bond with one year remaining to maturity and a 3 percent coupon rate and new bonds are paying 9 percent,what is the most you can get for your old bond?

Question

Quizplus · Accepted Answer

To calculate the most you can get for your old bond, you need to find the present value of future cash flows. For this bond, there are 2 cash flows:

1. Interest payment of $30 (=$1,000 x 3%) that you will receive at the end of the year
2. Principal payment of $1,000 that you will receive at the end of the year

To find the present value of these cash flows, you need to discount them at the current market rate of 9%.

PV of interest payment = $30 / (1+0.09) = $27.52 
PV of principal payment = $1,000 / (1+0.09) = $917.43

Total PV = $27.52 + $917.43 = $944.95

Therefore, the most you can get for your old bond is $944.95. The best choice is (B).

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