A bond has a maturity value of $500,000 payable in 3 years. These bonds have a 5% coupon rate payable annually, and the market yield was 2% when the bonds were purchased. How much will be recorded for the bond purchase (rounded)?
A)$43,257
B)$543,257
C)$500,000
D)$500,001

Question

Quizplus · Accepted Answer

To calculate the price of the bond, we need to use the formula:

Bond price = (Coupon payment / (1 + Yield)^1) + (Coupon payment / (1 + Yield)^2) + ... + (Coupon payment + Maturity value / (1 + Yield)^n)

where n is the number of years to maturity.

Here, the coupon payment is 5% of $500,000 = $25,000 per year.

Plugging in the values, we get:

Bond price = ($25,000 / (1 + 0.02)^1) + ($25,000 / (1 + 0.02)^2) + ($25,000 + $500,000 / (1 + 0.02)^3)
Bond price = $25,000 / 1.02 + $25,000 / 1.0404 + $525,000 / 1.061208 = $543,257.12

Therefore, the answer is B, $543,257.

A Bond Has a Maturity Value of $500,000 Payable in 3