Question

One year from now bond c should sell for ________ (to the nearest dollar).

Answer 1

Bond C should sell for $964 one year from now, based on the current market interest rate of 12%.

Step-by-step explanation:

One year from now, Bond C should sell for $964 (to the nearest dollar). In the scenario described, since the bond's interest rate is less than the current market interest rate of 12%, a comparable investment option would involve investing $964 to yield a return of $1,080 one year from now. Therefore, you wouldn't pay more than $964 for Bond C, bearing in mind that it will pay out a total of $1,080 in its final year, including the last interest payment and the principal repayment.

Answer 2

Considering a market interest rate of 12%, the maximum price you would be willing to pay for Bond C one year from now is $964, as this is the present value of the expected future cash flows from the bond amounting to $1,080.

Step-by-step explanation:

The value of Bond C one year from now, considering the current market interest rate of 12%, can be determined using the concept of present value. The bond's final year payments amount to $1,080, which includes the final interest payment plus the repayment of the principal amount of $1,000. To find the bond's price when its interest rate is less than the market interest rate, we compare it to an alternative investment that could yield the same future value ($1,080) with the current interest rate. The calculation demonstrates that investing $964 at a 12% interest rate would grow to $1,080 in a year, as shown in the equation $964(1 + 0.12) = $1080. Therefore, the maximum price you would be willing to pay for Bond C would be $964, to align with the present value of the expected future cash flows from the bond.