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Homework answers / question archive / Simon buys a bond, newly issued by GB corporation for $1,000

Simon buys a bond, newly issued by GB corporation for $1,000

Economics

Simon buys a bond, newly issued by GB corporation for $1,000. It pays $40 to its holder at the end of the first and second years and $1040 upon its maturity at the end of the third year.

  1. What are the principal amount, the term, the coupon rate and the coupon payment for Simon’s bond?
  2. After receiving the second coupon payment (at the end of the second year), Simon decides to sell the bond in the bond market. What price can he expect for his bond if the one-year interest rate is 2%? 6% ?

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Answer :-

Principle amount is the bonds amount :- 1000 $

Term will of 3 years

Coupon rate :-40/1000*100 =4 %

Coupon payment = $40 yearly

Answer 2

If 1 year interest rate 2 %

Selling price will be 1020 $

If 1 year interest rate 6 %

Selling price will be 980

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