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

Question

Quizplus · Accepted Answer

To determine whether the bond is selling at a premium or a discount, we need to compare the market rate to the bond's coupon rate. Since the market rate is lower than the coupon rate, the bond is selling at a premium (investors are willing to pay more than the face value to receive a higher interest rate). To calculate the premium, we need to find the present value of the bond's future cash flows. Using a financial calculator or spreadsheet, the present value of a 5-year, 7% annuity with a $100,000 future value is $94,830.06. Adding the present value of the bond's face value ($100,000) gives a total present value of $194,830.06. Comparing this to the bond's selling price would give us the premium or discount. However, the problem does not provide the selling price of the bond, so we cannot calculate the premium or discount. Therefore, the only valid choice is B, as the problem cannot be solved with the information given.

A $100,000 5-Year 7% Bonds Bond Is Issued on January