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 the present value of:
A)$10,000 in 5 years plus the present value of $700 a year for 5 years.
B)$700 paid once a year for 5 years.
C)$10,000 to be paid in 5 years.
D)$10,000 in 5 years minus the present value of $700 a year for 5 years.

Question

Quizplus · Accepted Answer

The issue price of the bond is calculated as the present value of the face value ($10,000) plus the present value of the annual interest payments ($700/year) for 5 years. This is because the stated interest rate of 7% is higher than the market interest rate of 5%, making the bond worth more than its face value. Therefore, choice A is the best option as it includes both the face value and the annual interest payments.

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