Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond is calculated as:
A)the present value of $10,000 to be received in 5 years plus the present value of $700 per year for 5 years.
B)the face value of the bonds,$10,000.
C)the amount investors would have to pay to earn 7% interest.
D)the amount investors would have to pay to earn an average of the stated interest rate and the market interest rate.

Question

Quizplus · Accepted Answer

The issue price of a bond is calculated based on the present value of the future cash flows expected from the bond. In this case, the bond will pay $700 per year for 5 years and $10,000 at maturity in 5 years. The market interest rate is 5%, which is the discount rate we will use to calculate the present value of these cash flows. Therefore, the issue price of the bond is the present value of $700 per year for 5 years and the present value of $10,000 to be received in 5 years, which is calculated as (700 x 4.329 + 10,000 x 0.783) = $12,118.39.

Your Company Issues a 5-Year Bond with a Face Value