Question

Simon purchases a bond, newly issued by Amalgamated Corporation, for $1,000. The bond pays $60 to its holder at the end of the first and second years and pays $1,060 upon its maturity at the end of the third year. a. What are the principal amount, the term, the coupon rate, and the coupon payment for Simon's bond? Instructions: Enter your responses as whole numbers. Principal amount: $0 Term: years Coupon rate: % Coupon payment $ D b. After receiving the second coupon payment at the end of the second year), Simon decides to sell his bond in the bond market. What price can he expect for his bond if the one-year interest rate at that time is 3 percent? 8 percent? 10 percent? Instructions: Enter your responses as whole numbers. Expected price for the bond at: 3 percent. $ 8 percent: $ 10 percent

Answer 1

A.

Principal amount = $1000

Term = 3 years

Coupon rate = 60/1000 = 6%

Coupon payment = $60

---------------------

B.

Expected price at 3% = 1060/(1+3%) = $1029.13 or $1029

Expected price at 8% = 1060/(1+8%) = $981.48 or $981

Expected price at 10% = 1060/(1+10%) = $963.64 or $964

-----------------------

C.

Correct Answer:

D

There is a bad news, investors might not get the value invested, leading to the fall in the value of the bond.