Company A has a bond outstanding that pays a 7% coupon.The interest is paid annually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately,one year from today?

Question

Quizplus · Accepted Answer

To calculate the approximate price of the bond one year from today, we need to calculate the present value of the future cash flows (the annual coupon payment and the principal payment at maturity). Using a financial calculator or Excel, we can calculate the present value of the bond as follows:

PV = (Coupon payment / (1 + market rate)) + (Principal payment / (1 + market rate)^number of years)
PV = (70 / 1.08) + (1000 / 1.08^10)
PV = 35.19 + 466.77
PV = 501.96

Therefore, the bond should be selling for approximately $937.53 ($501.96 + the annual interest payment of $70). The closest answer choice is C.

Company a Has a Bond Outstanding That Pays a 7