Question

1. The Professor purchases a newly issued, two-year government bond with a principal amount of $4 000 and a coupon rate of 5% paid annually to pay for Berlin’s medical treatment. One year before the bond matures (and after receiving the coupon payment for the first year), The Professor sells the bond in the bond market. The price (rounded to the nearest dollar) the Professor will receive for his bond if the prevailing interest rate is 6% is:

A. Higher than $4000

B. Lower than $4000

C. $4200

D. Better pay the treatment right away before Berlin dies

Answer 1

Correct Option is (B)

Explanation - After 1 year Professor sels the Bond. So, to sell the bond professor will keep the price which can give him/her that much money it could have given in that remaining 1 year after adjusted with inflation. $

So,

Professor would have got for remaining year = Principal Amount + Interest = $4000 + $4000(5/100) = $4200

Price of Bond + Current Interest Rate on that bond = $4200

P + P X (6/100) = $4200

1.06P = $4200

P = $3962

P < $4000

answered by: anonymous