A $100,000 5-year 7% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 6%. What is the selling price of the bonds, rounded to nearest dollar?
A)$4,213
B)$95,500
C)$100,000
D)$104,213

Question

Quizplus · Accepted Answer

The selling price of the bond is calculated using the present value of the bond's future cash flows, which include the annual interest payments and the principal amount at maturity. The annual interest payment is $100,000 * 7% = $7,000. The present value of these interest payments, discounted at the market rate of 6%, plus the present value of the $100,000 principal amount (also discounted at 6%), gives the selling price of the bond. Using the formula for the present value of an annuity and the present value of a single sum, the calculation results in a selling price of approximately $104,213.

A $100,000 5-Year 7% Bond Is Issued on January 1