Question

. Suppose this year you buy 5% coupon rate, $100 face value bond for $90 that has 3 years left till maturity. Suppose next year market interest rates decrease to 2% and you decide to sell it your bond that year.a) Calculate the selling price of your bond next year. In another words, what price would make your bond competitive when market yields are at 2.0%?

Answer 1

$105.83

Step-by-step explanation:

The computation of the selling price of the bond is as follows

Number of coupons remaining = n = 2

Coupon amount = C = 100 × 5% = $5

Maturity amount = FV = $100

Purchase price = P = $90

Selling price = PV of future payments at 2%

Now

Selling price = S is

= 5 × (P/A,0.02,2) + 100 × (P/F,0.02,2)

= 5 × 1.9416 + 100 × 0.9612

= $105.83