Question

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 14 percent, what is the most you can get for your old bond? $1,140 $997.19 $1,000 $903.51

Answer 1

The most you can get for your old bond with a $1,000 face value and 3% coupon rate is $964. This is based on comparing the expected payments from the bond with the current market interest rate of 12%.

Step-by-step explanation:

To determine the value of the old bond, we need to compare the expected payments from the bond with the current market interest rate. The expected payments from the bond one year from now are $1,080, which includes the final interest payment and the repayment of the original $1,000. Given that the current market interest rate is 12%, we can calculate that investing $964 in an alternative investment would yield $1,080 a year from now. Therefore, the most you can get for your old bond is $964, which is less than its face value of $1,000.

Answer 2

Answer: Option (d) is correct.

Step-by-step explanation:

Given that,

Face value = $1,000

Maturity = 1 year remaining

coupon rate = 3% ⇒ Coupon payment = 3% of 1000 = 30

New bonds paying (i) = 14% = 0.14

Payment will be received after one year = face value + coupon payment

= 1000 + 30

= 1030

Therefore,

Present value =
`(1030)/(1.14)`

= 903.50 ⇒ the most you can get for your old bond.