Six years ago, Colt, Inc. sold an issue of 30-year, $1,000 par value bonds. The coupon rate of 5.25% is payable annually. Investors presently require a rate of return of 8.375%. What is the current market price (intrinsic value) of the bonds? Round off to the nearest $1.

Question

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The current market price of the bond is calculated using the present value of future cash flows, which include the annual coupon payments and the par value at maturity, discounted at the current required rate of return (8.375%). The bond has 24 years remaining (30 - 6), and the annual coupon payment is $52.50 ($1,000 * 5.25%). The present value of these cash flows results in a price of approximately $681.

Six Years Ago, Colt, Inc