A one-year U.S. Treasury bond and a one-year corporation bond both promise to pay $11,934 next year. The corporation bond carries a risk premium of 15 percent over Treasury bond. The price of the Treasury bond today is $11,700. What is the price of the corporation bond?

Question

A one-year U.S. Treasury bond and a one-year corporation bond both promise to pay $11,934 next year. The corporation bond carries a risk premium of 15 percent over Treasury bond. The price of the Treasury bond today is $11,700.  What is the price of the corporation bond?

BlackTom AI · Accepted Answer

We start by restating the key data and what it implies for pricing:
- A 1-year Treasury bond pays $11,934 next year and today costs $11,700. This tells us the yield on the Treasury is (11,934 / 11,700) − 1 = 0.02 or 2%.
- The one-year corporation bond has a risk premium of 15 percentage points over the Treasury yield. That means its yield is 2% + 15% = 17% for the next year.

Now we price the corporate bond using the standard discounting approach with its yield:
- Price of corporate bond = Future payoff / (1 + yield) = 11,934 / 1.17 ≈ 10,202.56.

Next, we compare this result to the given answer choices and interpret potential rounding:
- Option $10,000.00 would imply a yield higher than 17% or a much larger discount; it is too small given a 17% required yield on a $11,934 payoff.
- Option $10,100.00 is also too small and would correspond to a yield a bit above 17%, not matching the precise calculation.
- Option $10,200.00 is very close to the computed $10,202.56; rounding to the nearest cent would give about $10,202.56, and to the nearest dollar this is $10,202, which aligns with the $10,200.00 option.
- Option $10,300.00 is slightly higher than the computed price; it would occur only if the yield were a touch lower than 17%, which contradicts the given 15 percentage-point risk premium.
- Option 'None of the above' would be incorrect because the calculation yields a value very near $10,200.00, which is represented among the options.

In summary, applying the 17% yield to the $11,934 payoff produces a price just over $10,200, making the $10,200.00 option the closest and most consistent choice with the stated data.

ECN 001B C01-C06 WQ 2025 Midterm Examination 2 (Winter 2025)

A one-year U.S. Treasury bond and a one-year corporation bond both promise to pay $11,934 next year. The corporation bond carries a risk premium of 15 percent over Treasury bond. The price of the Treasury bond today is $11,700. What is the price of the corporation bond?

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ECN 001B C01-C06 WQ 2025 Midterm Examination 2 (Winter 2025)

A one-year U.S. Treasury bond and a one-year corporation bond both promise to pay $11,934 next year. The corporation bond carries a risk premium of 15 percent over Treasury bond. The price of the Treasury bond today is $11,700. What is the price of the corporation bond?

View Explanation

Log in for full answers

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You have purchased a bond with a ​7% annual coupon rate for ​$1,060. What will happen to the​ bond's price if market interest rates​ rise?

On January 1st, 2005, Borrower Limited sold a 10%, five-year, $100 million bond when bonds of equivalent risk and maturity were yielding 5% annually. Interest payments are made on January 1st next year. What is the Price of the Bond?

All bonds considered below have a face value of $1000. The two-year zero-coupon bond is trading at $906.86 while the two-year bond with annual coupon rate 3% is trading at $962.96. In the absence of arbitrage, what is the fair price of the one-year zero-coupon bond?

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