Question

If the final expressions in a present value equation used to calculate the price of a bond you are considering buying are "[$50 / (1 + .08) 3] + [$500 / (1 + .08) 3]", which of the following is correct?a.The face value is $500, the coupon is $50, and the coupon will mature in 3 years.b.The face value is $50, the interest rate you need is 8 percent, and the coupon will mature in 3 years.c.The face value is $500, the interest rate you need is 3 percent, and the coupon will mature in 8 years.d.The coupon is $50, the interest rate you need is 1.08 percent, and the coupon will mature in 3 years.

Answer 1

Answer: A. The face value is $500, the coupon is $50, and the coupon will mature in 3 years

Explanation: From the above question, one is able to note that the interest rate (r) is 8%, time (t) is 3 years to maturity and the face value of the bond is $500 while the coupon is $50.

The above is a formula for coupon-bearing bond and it shows that the price of a bond is the present value of its promised cash flows.