A 20-year bond pays 9% on a face value of $1,000. If similar bonds are currently yielding 6%, what is the market value of the bond? Use annual analysis.
A) Under $1,300
B) Exactly $1,000
C) Over $1,300
D) Not enough information is given to tell.

Question

Quizplus · Accepted Answer

To calculate the market value of the bond, we need to discount the bond's future cash flows at the current yield rate of 6%. The bond pays $90 ($1,000 x 0.09) in interest annually for the next 20 years. Using the present value of an annuity formula, we get:

PV = C x ((1 - (1 + r)^-n) / r)
PV = $90 x ((1 - (1 + 0.06)^-20) / 0.06)
PV = $1,311.82

Therefore, the market value of the bond is over $1,300, which is Choice C.

A 20-Year Bond Pays 9% on a Face Value of $1,000