Question

You have just purchased a newly issued municipal bond for $1,000. The bond pays $50 to its holder at the end of the the first, second, and third years and pays $1,050 upon its maturity at the end of the following year. a. What are the principal amount, the term, the coupon rate, and the coupon payment for your bond? Instructions: Enter your responses as whole numbers. Principal amount: $ Term: years Coupon rate: % Coupon payment: $ b. If you decide to sell your bond at the end of 3 years (after receiving the third $50 payment), what price can you expect for your bond if the one-year interest rate at that time is 2 percent? 4 percent? 6 percent? Instructions: Enter your responses as whole numbers. Expected price for the bond at: 2 percent: $ 4 percent: $ 6 percent: $

Answer 1

Answer

The answer and procedures of the exercise are attached in the 2 images below.  

Explanation  

Please consider the data provided by the exercise. If you have any question please write me back. All the exercises are solved in a 2 sheets with the formulas indications.  

Answer 2

a. The principal amount is $1,000.

The term is 4 years.

The coupon rate is 5% ($50/$1,000 x 100).

b. The expected price for the bond at:

i) 2 percent is $1,029.41.

Data and Calculations:

N (# of periods)  = 1 year

I/Y (Interest per year) = 2%

PMT (Periodic Payment) = $50

FV (Future Value) = $1,000

Results:

PV = $1,029.41

Sum of all periodic payments = $50.00

Total Interest $20.59

ii) 4 percent is $1,009.62.

Data and Calculations:

N (# of periods)  = 1 year

I/Y (Interest per year) = 4%

PMT (Periodic Payment) = $50

FV (Future Value) = $1,000

Results:

PV = $1,009.62

Sum of all periodic payments = $50.00

Total Interest $40.38

iii. 6 percent is $990.57

Data and Calculations:

N (# of periods)  = 1 year

I/Y (Interest per year) = 6%

PMT (Periodic Payment) = $50

FV (Future Value) = $1,000

Results:

PV = $990.57

Sum of all periodic payments = $50.00

Total Interest $59.43

How is the expected price of a bond determined?

The expected price of a bond is determined using the present value of the cash flows.

The present value of the cash flows can be computed using an online finance calculator as above.

Thus, the principal is the amount of investment or loan, the term is the maturity period, and the coupon rate is the interest rate based on the loan or bond issuance.

Learn more about determining the prices of bonds at https://brainly.com/question/25596583