Question

A $1,000 bond has a coupon of 11 percent and matures after 15 years. What would be the bond's price if comparable debt yields 6 percent?

A$1,179.43

B$840.46

C$922.15

D$1,485.61

Answer 1

The bond price is computed as shown below:

The coupon payment is computed as follows:

= 11% x $ 1,000

= $ 110

So, the price of the bond will be as follows:

= $ 110 / 1.06¹ + $ 110 / 1.06² + $ 110 / 1.06³ + $ 110 / 1.06⁴ + $ 110 / 1.06⁵ + $ 110 / 1.06⁶ + $ 110 / 1.06⁷ + $ 110 / 1.06⁸ + $ 110 / 1.06⁹ + $ 110 / 1.06¹⁰ + $ 110 / 1.06¹¹ + $ 110 / 1.06¹² + $ 110 / 1.06¹³ + $ 110 / 1.06¹⁴ + $ 110 / 1.06¹⁵ + $ 1,000 / 1.06¹⁵

= $ 1,485.61 Approximately

So, the correct answer is option D.

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