If you own a $1000 face value bond with one year remaining to maturity and a 5 per cent coupon rate,and new bonds are paying 12 per cent,what is the most you can get for your old bond?
A) $1120
B) $1000
C) $937.50
D) Impossible to determine without additional information

Question

Quizplus · Accepted Answer

The most you can get for your old bond is the present value of its cash flows discounted at the new market rate of 12%. Using the formula for present value of a bond:
PV = (C/r) x (1-1/(1+r)^n) + FV/(1+r)^n
where:
C = coupon payment per year = $50 ($1000 x 5%)
r = discount rate = 12%
n = number of years remaining until maturity = 1
FV = face value of the bond = $1000

Plugging in the values, we get:
PV = (50/0.12) x (1 - 1/(1+0.12)^1) + 1000/(1+0.12)^1
PV = $895.83 + $800.91
PV = $1696.74

Therefore, the most you can get for your old bond is $1696.74. However, since the face value of the bond is only $1000, you can only receive the face value of $1000. Therefore, C is the best choice as it is the closest option to the face value of the bond.

If You Own a $1000 Face Value Bond with One