Question

What is your Willing to Pay (WTP) for a Bond with a 3% Coupon and Maturity in ten (10) years at $1,000 if you want a return of 4%? Draw a Timeline for yourself.

Group of answer choices

$919.

$676.

$243.

$1,063.

Answer 1

	Frequency in a year	1
	YTM	4.00%
	Coupon rate	3.00%
	Face value	$       1,000
	Coupon payment	$       30.00	=1000*3%/1
	Years to maturity	10
	No. of periods	10
		4.00%
Year	Cash Flow	PV factor = 1/ (1+r)^t	PV
0	$                            -	1.000	$           -
1	$                      30.00	0.962	$          29
2	$                      30.00	0.925	$          28
3	$                      30.00	0.889	$          27
4	$                      30.00	0.855	$          26
5	$                      30.00	0.822	$          25
6	$                      30.00	0.790	$          24
7	$                      30.00	0.760	$          23
8	$                      30.00	0.731	$          22
9	$                      30.00	0.703	$          21
10	$                      30.00	0.676	$          20
10	$                 1,000.00	0.676	$        676
		Total present value	$        919
	So the total present value of future cashflow will be the price of bond i.e. $ 919