question 66

Bora purchases a 30 year annual coupon bond in the primary market for $1,000. The bond has a yield to maturity that reflects a risk free rate of 4% and a risk premium of 6%. Immediately before his 4^thcoupon payment, Bora decides to sell the bond.At the time of sale, the economy is in a recession. The risk free rate has fallen to 2% and the risk premium has fallen to 1%.

b) What would the selling price be if it was a 20 year bond instead of a 30 year bond?

(To have a full mark in this question, you NEED to show your work in detail (all the STEPS of your CALCULATION). Please provide your solution

a)

None of the answers are correct

b)

Around $2,251

c)

Around $1,979

d)

Around $2,751

e)

Around $1,551