(Q. 15 IN B) IF YOU PURCHASE A THREE-YEAR, 9% COUPON BOND FOR $950...

12. (Q. 15 in B) If you purchase a three-year, 9% coupon bond for $950 today, how much could it be sold for two years later if interest rates are expected to remain stable over the next two years? A) $964.95B) $981.52 C) $1,000.00 D) $1,033.17 Solution B The market interest rate is given by: $950 = $45 x PVIFA(i,6) + $1,000 x (1+i)

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i = 5.5009% Two years later, there will be only 2 coupons left, the price will be: Price = $45 x PVIFA(5.5009%,2) + $1,000 x (1+i)

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= $981.52