Billow Company has issued a 3% bond that is payable in 5 years and has a face value of $100,000. The risk-adjusted market rate is 4%. Calculate the fair value of the bond.
A) $82,193
B) $13,355
C) $68,838
D) $95,548

Question

Quizplus · Accepted Answer

The fair value of the bond is calculated using the present value of its future cash flows, which include the annual interest payments and the principal amount at maturity. The annual interest payment is 3% of $100,000, which equals $3,000. The present value of these interest payments, discounted at the market rate of 4% over 5 years, plus the present value of the principal amount ($100,000) discounted at the same rate over the same period, gives the fair value of the bond. The correct calculation results in a fair value of approximately $95,548.

Billow Company Has Issued a 3% Bond That Is Payable