Question

Sydney purchases a newly-issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if the prevailing interest rate is 5%?

Answer 1

Answer:

$10095.24

Explanation:

Let recall that,

The government bond with a principal amount = $10000

coupon rate of 6% annually

The interest rate  given is = 5%

PV (Price value) = total [Ct/ (1+r)^t] + principal/(1+r)^t

Then

Price value  = 600/(1+0.05) + 600/(1+0.05)^2 + 10000/(1+0.05)^2

600/1.05 + 600/1.1025 + 10000/1.1025

571.429 + 544.2177 + 9070.295

It gives= 10185.94

Once   the first coupon is deducted  (-571.429), the present value of today is 9614.512

Therefore,

in one year's time ,it will be, 9614.512 x 1.05 = 10095.24