Question

Suppose a $1,000 bond pays $40 per year in interest. Instructions: In part a, round your response to one decimal place. In part b, round your response to two decimal places. a. What is the contractual interest rate ("coupon rate") on the bond? 4 % b. If market interest rates rise to 5 percent, what price will the bond sell for? $

Answer 1

Answer:

The correct answer for option (a) is 4% and for option (b) is $800.

Explanation:

According to the scenario, the computation for the given data are as follows:

Face value = $1,000

Annual interest = $40

Interest rate = 5%

(a). We can calculate the contractual interest rate by using following formula:

Contractual interest rate = Annual interest ÷ Face value

= $40 ÷ $1000

= 0.04 or 4.0%

(b). we can calculate the price of bonds by using following formula:

Price of bonds = Annual interest ÷ Market interest rate

= $40 ÷ 5%

= $800.00