Question

If the approximate market value for of a $1,000 corporate bond is $1,200 and it pays 6 percent interest, then what are comparable bonds paying? Multiple Choice 2 percent 3 percent 4 percent 5 percent

Answer 1

Given that;
Approximate market value of the bond is $1200
Interest rate is 6%
Annual interest=(Face value)*(Interest rate)
=1000*6%=60
Now, we need to use the following formula to determine the comparable interest rate:
Approximate market value = (Annual interest) /(Comparable interest rate)
Substituting the values, we get;
1200 = 60/Comparable interest rate
=>Comparable interest rate=60/1200
=0.05 or 5%

Answer: Hence, the comparable bonds are paying an interest of 5%. So, the option "5 percent" is correct.