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Bond A has a 7% coupon rate, paid annually. Maturity is in three years. The bond...

Bond A has a 7% coupon rate, paid annually. Maturity is in three years. The bond sells at par value $1000. The actual price of the bond if the interest rate immediately increases from 7% to 8% is____.  

A.

976.25
B.

973.23
C.

974.23
D.

978.23
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Answer #1

The price of the bond is computed as shown below:

The coupon payment is computed as follows:

= Coupon rate x Par value

= 7% x $ 1,000

= $ 70

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

= $ 70 / 1.081 + $ 70 / 1.082 + $ 70 / 1.083 + $ 1,000 / 1.083

= $ 974.23 Approximately

So, the correct answer is option C.

Feel free to ask in case of any query relating to this question

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