Final answer:
The price of a bond with a 10-year term to maturity and a 5% coupon rate depends on the current market interest rate. If the market rate is higher than the coupon rate, it is sold at a discount, and if it is lower, at a premium.
Step-by-step explanation:
To compute the price of a bond with a 10-year term to maturity and a coupon rate of 5%, you need to consider the current market interest rate. If the market interest rate is the same as the coupon rate, the bond will typically be sold at face value. If the market interest rate is higher than the coupon rate, the bond will be sold at a discount, meaning you would pay less than the face value. Conversely, if the market interest rate is lower than the coupon rate, the bond will sell at a premium, and you will pay more than the face value.
For instance, using the present value formula, let's consider a bond paying annual coupon payments with a face value of $1,000 and a coupon rate of 5%. If the market rate is also 5%, each yearly coupon payment would be $50 (5% of $1,000), and the bond price would be close to $1,000, assuming no significant changes in market conditions.