Current interest rates are 8%. You want to buy a long-term bond with a face value of $1000 that pays a coupon rate of 10%. Which of the following prices is feasible? $888.88 $1,000.00 $1,111.11 Not enough information to answer. None of the above is feasible.
Current interest rates are 8%. You want to buy a long-term bond with a face value of $1000 that pays a coupon rate of 10%. Which of the following prices is feasible? $888.88 $1,000.00 $1,111.11 Not enough information to answer. None of the above is feasible.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Current interest rates are 8%. You want to buy a long-term bond with a face value of $1000 that pays a coupon rate of 10%. Which of the following prices is feasible?
- $888.88
-
$1,000.00
-
$1,111.11
-
Not enough information to answer.
-
None of the above is feasible.
Expert Solution
Step 1: Define bond price
Bond price refers to the market value or the current price at which a bond can be bought or sold in financial markets. It is determined by various factors such as the bond's face value, coupon rate, time to maturity, prevailing interest rates, and creditworthiness of the issuer. Bond prices have an inverse relationship with interest rates, meaning that when interest rates rise, bond prices tend to fall and vice versa. The price of a bond is also influenced by supply and demand dynamics in the market.
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