A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today.

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the bond using the following formula:
PV = [C/(1 + r)^1] + [C/(1 + r)^2] + ... + [C + FV/(1 + r)^n]
PV = [90/(1 + 0.11)^1] + [90/(1 + 0.11)^2] + ... + [90 + 1,000/(1 + 0.11)^20]
PV = $840.73
Therefore, the firm's bond will sell for $840.73 today.

A Firm Has an Issue of $1,000 Par Value Bonds