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Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is: A. $10,000.
B. $500.
C. greater than $10,000.
D. less than $10,000.

Respuesta :

TomShelby

Answer:

C. greater than $10,000.

Explanation:

Because the current interest is 5%

The market will create a premium on the 6% bonds to make it yield 5%

This premium will increase the bond value above 10,000, which is the face value.

We can clcualte the market price at this time by calcualting the present value of the amount received in one year at the current market rate.

[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]  

Maturity = 10,600.00 = 10,000 face value + 6% interest = 10,600

time 1 year

curent market-rate 5% = 5/100 = 0.05

[tex]\frac{10600}{(1 + 0.05)^{1} } = PV[/tex]  

PV   10,095.24

The present value is greater than 10,000 Option C is confirmed as correct.

From the common sense and the calculus.

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