Flo's Florals has a pure discount bond that comes due in one year and has a face value of $1,000. The risk-free rate of return is 3.7 percent. Flo's assets are expected to be worth either $950 or $1,100 in one year. Currently, these assets are worth $1,040. What is the current value of the debt of Flo's Florals?

Question

Quizplus · Accepted Answer

The correct answer is C. The current value of the debt of Flo's Florals is $957.40. This is because the expected value of the assets is $1,025, which is less than the face value of the bond. Therefore, the bond is expected to be worth less than its face value, and the current value of the debt is $957.40.

Flo's Florals Has a Pure Discount Bond That Comes Due