Electronic Importers has a pure discount bond with a face value of $25,000 that matures in one year.The risk-free rate of return is 3.8 percent.The assets of the business are expected to be worth either $23,000 or $35,000 in one year.Currently,these assets are worth $27,500.What is the current value of the bond?

Question

Quizplus · Accepted Answer

Number of options needed = ($35,000 - $23,000)/($10,000 - $0) = 1.2$27,500 = 1.2C₀ + ($23,000/(1 + 0.038)); C₀ = $4,451.67Value of debt = $27,500 - $4,451.67 = $23,048

Electronic Importers Has a Pure Discount Bond with a Face