question archive You can buy a bond that would pay you cash streams of $1,000 next year and another $1,000 plus its face value of $10,000 the following year (when it matures)
You can buy a bond that would pay you cash streams of $1,000 next year and another $1,000 plus its face value of $10,000 the following year (when it matures)
Subject:EconomicsPrice:2.84 Bought6
You can buy a bond that would pay you cash streams of $1,000 next year and another $1,000 plus its face value of $10,000 the following year (when it matures). How much would you be willing to pay for this bond today if the interest rate you could earn on other equally risky assets is 5%?
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We find the price of the bond today:
Coupon (C) = $1000
Face Value (F) = 10,000
Time (n) = 2 years
Rate (r) = 0.05
Bond price=C∗[r1 − (1 + r)−n?] + (1 + r)nF?
Bond price=1000∗[0.051 − (1 + 0.05)−2?] + (1 + 0.05)210,000?
Bond price = $10,929.71
You be willing to pay $10,929.71 for this bond today
