Final answer:
The bond's price is determined by discounting future cash flows by the current market interest rate. After one year, the bond's value will change based on the prevailing interest rates, and its rate of return will include interest payments and potential capital gains or losses.
Step-by-step explanation:
The question asked involves calculating the current market price of a quarterly coupon bond, its price after a year, and the total rate of return if the bond is sold in a year. To answer this question, we need to have a clear understanding of how bonds work, including the concepts of coupon payments, market interest rates, and present value calculations.
A bond's price is the present value of its future cash flows, which consist of coupon payments and the final face value payment. The current market price of the bond can be calculated by discounting each of these cash flows back to the present using the market interest rate. Assuming an annual coupon rate of 10% for a face value of $1,000, the bond would pay $100 annually or $25 quarterly.
To find the bond's price after a year and its total rate of return, we would need to recalculate its market price based on the interest rates at that time and consider the coupon payments received and any changes in the bond's value.
If the market interest rate increases, the price of the bond will decrease, as previously issued bonds with lower interest rates become less attractive compared to new bonds that can be purchased with higher yields. Conversely, if market interest rates fall, the price of existing bonds with higher rates goes up.