102) An analyst is considering the purchase of a Govenment of Canada bond that w

Question

102) An analyst is considering the purchase of a Govenment of Canada bond that will pay its face value of $10,000 in one year's time, but pay no direct interest. The market interest rate is 4% and the bond is being offered far sale at a price of $9400. The analyst should recommend A) purchasing the bond because the purchase price is more than its present value and is therefore profitable. B) purchasing the bond because the purchase price is less than its present value and is therefore profitable C) not purchasing the bond because the purchase price is less than its present value. D) not purchasing the bond because the buyer could earn an additional $376 by investing the $9400 elsewhere. E) not purchasing the bond because the buyer could earn an additional $224 by investing the $9400 elsewhere

Explanation / Answer

Ans:

Option B

Purchase the bond because the purchase price is less than its present value and is therefore profitable.

Value of the bond = Cash Flow(CF) / (1+r)n

   = $10,000 / (1+0.04)^1

   = $9615

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