Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Question

Quizplus · Accepted Answer

The bond's price can be calculated using the present value formula for bonds, which is the sum of the present value of the annuity (coupon payments) and the present value of the par value (face value). The formula is: Price = (C * (1 - (1 + r)^-n) / r) + (F / (1 + r)^n), where C is the annual coupon payment, r is the market interest rate (expressed as a decimal), n is the number of years until maturity, and F is the face value of the bond. Plugging in the given values: C = $70, r = 0.085, n = 7, and F = $1,000, we get Price = ($70 * (1 - (1 + 0.085)^-7) / 0.085) + ($1,000 / (1 + 0.085)^7) ≈ $923.22.