Question
The government of Mont-Ecar-Low issued a $1,000 par value bond with a coupon rate of $150 per year, but this bond would not mature for
The government of Mont-Ecar-Low issued a $1,000 par value bond with a coupon rate of $150 per year, but this bond would not mature for 1,000,000,000,000 years. If investor's required rate of return on this bond is 15 percent, can you calculate the expected market price of this bond and if yes, what is the expected market price?
a) | Yes, an expected market price can be calculated, but the only way is to use a large computer that can add up the present value of 1,000,000,000,000 coupon payments of $150 each and the present value of the par value of the bond. |
b) | No, because all of today's investors will be dead before the bond matures. |
c) | Yes, the current value of the bond is within rounding error of zero because using 15% to discount for 1,000,000,000,000 years reduces almost any dollar amount to zero. |
d) | No, because a calculator will not accept 1,000,000,000,000 for the number of compounding periods and 1,000,000,000,000 years is not on any chart of discounting factors. |
Yes, because the coupon rate of 15% is equal to the discount rate of 15%, the bond will trade at par value of $1,000. |
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