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24. Suppose you buy a bond on January 1st, 2012. the bond matures in exactly three years. bond on January 1st, 2014? a. $2086.97 b. $2166.67 c. $1916.67 d. $2254.90 The principal amount is S2,000, the coupon rate is 15% and If the prevailing interest rate is 20%, for how much can you sell the

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Answer #1

Answer- c) $1916.67

On January 1st, 2014, we will have bond on which Interest of $ 300 is to be received along with pricipal amount of $ 2000 i.e. 2300. But It will be received only after one year on January 1st, 2015. Thus to derive its value on January 1st, 2014, we have to discount it @20% (because this is the interest rate prevailing in the market, no one would accept rate less than market rate) which becomes $1916.67. Calculation as follows:

Present Value of 2300 on January 1st, 2014 will be

2300/1.20 = 1916.67

So, correct answer is (c).

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