Star Corp. purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 5%. At what amount will the bond be recorded (rounded)?

Question

Quizplus · Accepted Answer

The bond's present value can be calculated as follows:
PV = (C/ r) x [1 - (1/ (1 + r)^n)] + FV / (1 + r)^n
Where,
C = Annual coupon payment = 6% x $100,000 = $6,000
FV = Face value of bond = $100,000
r = Market rate = 5%
n = Time to maturity = 2 years
Substituting the values in the above formula, we get:
PV = ($6,000/ 0.05) x [1 - (1/ (1 + 0.05)^2)] + $100,000 / (1 + 0.05)^2
= $111,859.13
Therefore, the bond will be recorded at $101,859 (rounded).

Star Corp Purchases a $100,000 Face Value Bond Which Matures in in Two