Question 9 Not yet Suppose the interest rate on a $2000 (face value) bond is 6%

Question

Question 9 Not yet Suppose the interest rate on a $2000 (face value) bond is 6% per annum; and suppose the bond has two years to ma rity, and suppose the discount rate is 75%. The bond price is Points out of 4.00 F Flsg Select one: O A. $215.47 B. s973.06 C. $1946.13 D. S2055 Question 10 Not yet Points out of 4.00 Select one: Flag queston A. "Informational efficiency" of the stock market. B. The efficiency of fundamental analysis to identify which stocks to buy or sell. C. Efficient management of mutual funds. D. Efficiency of investors' preferences. 4

Explanation / Answer

Question 9

Face value of bond = $2,000

Interest rate = 6% per annum or 0.06

Bond will mature in two years.

So, in first year, we will get interest and in second year, we will get interest plus face value of bond.

Thus,

Cash flow in Year 1 = $2,000 * 0.06 = $120

Cash flow in Year 2 = $120 + $2,000 = $2,120

In order to find bond price, we have to find the present value of the above stated cash flows at the given discount rate.

Present Value = $120(P/F, 7.5%, 1) + $2,120(P/F, 7.5%, 2)

Present Value = ($120 * 0.9302) + ($2,120 * 0.8653)

Present Value = $1,946.13

The bond price is $1,946.13

Hence, the correct answer is the Option (c).

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