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Consider a bond paying a coupon rate of 10% per year, compounded annually, when the market...

Consider a bond paying a coupon rate of 10% per year, compounded annually, when the market interest rate (return on investments of like risk) is 20% per year. The bond has THREE years until maturity from today.   What is the bond’s price one year from today after the next coupon is paid? Give the answer in dollars and cents.

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Expert Solution

Answer :

Price of bond after one year = Interest * (1+rate)^t + Face Value * (1+rate)^t

As price is to be calculated after one year. So There will be two interest.

Face Value = 1000

Interest = 1000 * 10% ==> 100

Price = 100 / 1.2^1 + 100 / 1.2^2 + 1000 / 1.2^2

Price = 847.22

jeff jeffy answered 2 years ago
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