Company A has a bond outstanding that pays a 7% coupon.The interest is paid annually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately?

Question

Quizplus · Accepted Answer

To find the approximate price of the bond, we can use the formula:
Bond Price = (Coupon Payment / Interest Rate) x [1 - 1/(1 + Interest Rate)^Number of Years] + Face Value / (1 + Interest Rate)^Number of Years

Plugging in the values, we get:
Bond Price = (70 / 0.08) x [1 - 1/(1 + 0.08)^10] + 1000 / (1 + 0.08)^10
Bond Price = 875 x 0.469 + 1000 / 2.1589
Bond Price = 410.875 + 463.106
Bond Price = $873.98

Therefore, the bond should be selling for approximately $932.90, which is closest to option B.

Company a Has a Bond Outstanding That Pays a 7