Question

Chris pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Chris sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price Chris receives is:A. $10,000.B. $700.C. greater than $10,000.D. less than $10,000.

Answer 1

Answer:

D. less than $10,000.

Explanation:

As for the provided information we have,

Bond face value = $10,000

Coupon rate = 6%

Maturity value = $10,000

Rate of interest = 7%

Number of period = 1

Bond value = $C \times (\frac{(1- \frac{1}{(1 + 0.07)^1})}{0.07} ) + \frac{10,000}{(1 + 0.07)^1}$

Where, C = $10,000 $\times$ 0.06 = $600

Now putting values we have,

Bond value = $600 \times (\frac{(1- \frac{1}{(1 + 0.07)^1})}{0.07} ) + \frac{10,000}{(1 + 0.07)^1} = 9,906.67$

Since the value is less than $10,000

Correct option is :

D. less than $10,000.