A $100,000 5-year 7% bond is issued on January 1,2012.The bond pays interest annually.The market rate is 6%.What is the selling price of the bonds,rounded to nearest dollar?

Question

Quizplus · Accepted Answer

The selling price of a bond can be calculated using the present value of its future cash flows, which in this case are annual interest payments of $7,000 (7% of $100,000) and a final payment of the bond's face value of $100,000. The present value of these cash flows can be calculated as follows:

PV = (7,000 / 1.06) + (7,000 / 1.06^2) + (7,000 / 1.06^3) + (7,000 / 1.06^4) + (107,000 / 1.06^5)
PV = 6,604.73 + 6,215.20 + 5,849.27 + 5,505.08 + 82,127.58
PV = 106,301.86

Therefore, the selling price of the bond is $104,213 rounded to nearest dollar, which is option D.

A $100,000 5-Year 7% Bond Is Issued on January 1,2012