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

The bond's price is calculated using the present value of its future cash flows, which include annual interest payments and the principal at maturity. Given the bond's coupon rate is lower than the current market rate, it will sell at a discount. Calculating the present value of the bond's cash flows using the market rate of 11% results in approximately $840.67.

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