Question

A 1,000 7% ten-year bond with annual coupons is redeemable for 1,400 and has an annual yield of jj.
BtBt is the balance of debt, or the book value, at time tt, for a bond.

Which one of the following formulas is INCORRECT?


B3=70a7¯¯¯|j+1400(1+j)−7B3=70a7¯|j+1400(1+j)−7
B3=70s3¯¯¯|j+1000(1+j)3B3=70s3¯|j+1000(1+j)3
B3=(1+j)B2−70B3=(1+j)B2−70
B3=1400(0.05−j)a7¯¯¯|j+1400

Answer 1

Options are not clear in the question. In case stands for the value of bond after 3 years. Then it should depend on cash payouts in the remaining seven years of the bond. The coupon payment for years 4 to 9 is $70, and at the end of ten years a total payout of $1,070 is made. Hence,

For calculating the yield r, we go back to time t = 0, where the value of the bond is $1,400. Hence,

On solving,

On simplifying,