Question

(b) Now suppose you have purchased a 3-year bond with face value of $1000, a 7% annual coupon, and a price of $975. Assuming that you hold the bond to maturity, is the IRR greater or less than the return on the bond in part (a)?

Answer 1

The price of the bond will be less than $10,000.

Step-by-step explanation:

In this case, the bond in part (a) has a face value of $10,000, a coupon rate of 8%, and interest rates of 12%. Since interest rates have risen, the bond's price will be less than the face value. To calculate the price, we can use the formula:

Bond Price = (Coupon Payment) / (1 + Interest Rate) + (Face Value) / (1 + Interest Rate)^N

Using this formula, we can calculate the price of the bond based on the given information. The price of the bond will be less than $10,000.