A bond matures in 20 years,at which time it pays the owner $1,000.It also pays $70 at the end of each of the next 20 years.If similar bonds are currently yielding 8%,what is the market value of the bond?

Question

Quizplus · Accepted Answer

To find the market value of the bond, we need to discount all the future cash flows to present value using the current yield of 8%.

For the $1,000 payment at maturity in 20 years:
PV = $1,000 / (1 + 0.08)^20 = $214.55

For the 20 annual $70 payments:
PV = $70 * [(1 - 1 / (1 + 0.08)^20) / 0.08] = $708.50

Thus, the total market value of the bond is:
PV(total) = $214.55 + $708.50 = $923.05

Since the market value is less than the face value of $1,000, the bond is trading at a discount and the answer is B, under $1,000.

A Bond Matures in 20 Years,at Which Time It Pays