How Much Should You Be Prepared to Pay for a 10-Year

question 25

Multiple Choice

How much should you be prepared to pay for a 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%?

• A) $411.84
• B) $897.04
• C) $985.00
• D) $1,000.00

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Definitions:

Modified Duration

A measure of the sensitivity of a bond's price to a change in interest rates, adjusting for the fact that the bond's cash flows change as yields change.

Maturity

The specific day when the core sum of a financial product, like a bond or loan, must be paid back to the investor.

Semiannually

Occurring twice a year; every six months.

Zero-coupon Bond

A type of bond that does not pay interest during its life; it is sold at a discount from its face value and the return is realized when the bond matures.