A $100,000 5-year 6% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 8%. What is the selling price of the bonds, rounded to nearest dollar?

Question

Quizplus · Accepted Answer

The selling price of the bond is determined by discounting the future cash flows (interest payments and the principal repayment at maturity) back to their present value using the market interest rate. Since the market rate (8%) is higher than the coupon rate (6%), the bond will sell at a discount. The present value of the interest payments and the principal amount can be calculated using the present value formulas for an annuity and a lump sum, respectively.

A $100,000 5-Year 6% Bond Is Issued on January 1