Question

Chris pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Chris sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price Chris receives is:A. $10,000.B. $700.C. greater than $10,000.D. less than $10,000.

Answer 1

D. less than $10,000.

Step-by-step explanation:

As for the provided information we have,

Bond face value = $10,000

Coupon rate = 6%

Maturity value = $10,000

Rate of interest = 7%

Number of period = 1

Bond value =
`C * (((1- (1)/((1 + 0.07)^1)))/(0.07) ) + (10,000)/((1 + 0.07)^1)`

Where, C = $10,000
`*` 0.06 = $600

Now putting values we have,

Bond value =
`600 * (((1- (1)/((1 + 0.07)^1)))/(0.07) ) + (10,000)/((1 + 0.07)^1) = 9,906.67`

Since the value is less than $10,000

Correct option is :

D. less than $10,000.