A firm has an issue of $1000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for_________ today.

Question

Quizplus · Accepted Answer

The bond's price is calculated using the present value of its future cash flows, which include annual interest payments and the principal at maturity. Since the market rate (8%) is lower than the bond's coupon rate (12%), the bond will sell at a premium. The present value of these cash flows at the market rate results in a price of $1,268.

A Firm Has an Issue of $1000 Par Value Bonds