A $100,000 5-year 5% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 7%. What is the selling premium or discount on the bonds, rounded to nearest dollar?

Question

Quizplus · Accepted Answer

The bond will sell at a discount because its coupon rate (5%) is less than the market rate (7%). To find the discount, calculate the present value of the bond's cash flows (interest payments and principal repayment) discounted at the market rate. The difference between the bond's face value ($100,000) and its present value is the discount. Without doing the exact calculations, we know the answer must be a discount, not a premium, and the closest choice is $8,200 discount.

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