Question

Assume you have some money and want to save to amass a given amount at the...

Assume you have some money and want to save to amass a given amount at the end of 5 years. One of the options you have is a 5 year, 10% coupon bond that is currently selling at Par.

Assume that bond is default free. What will determine the total amount of money you will accumulate at the end of year 5 if you buy the bond today?

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Answer #1

The bond is selling at par and the coupon rate is 10% which will be received each year . As the bond is risk free thus the amount of money that you will accumulate after 5 year will depend on whether you reinvest the amount received as interest each year or not .

Note : change in interest rate can result in change in price of the bond it can be at discount or premium in between 5 years but in the question we have been asked about the total accumulated value after maturity of bond

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