A $100,000 5-year 6% bonds bond is issued on January 1,2012.The bond pays interest annually.The market rate is 7%.What is the selling price of the bonds,rounded to nearest dollar?

Question

Quizplus · Accepted Answer

The selling price of the bonds is determined by discounting the future cash flows (interest payments and the principal repayment) back to their present value using the market interest rate (7% in this case). The cash flows consist of 5 annual interest payments of $6,000 (6% of $100,000) and a final repayment of the $100,000 principal. Using the present value formulas for an annuity (for the interest payments) and a single sum (for the principal repayment), the calculation results in a selling price of approximately $95,500, rounded to the nearest dollar.

A $100,000 5-Year 6% Bonds Bond Is Issued on January