Exhibit 12-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a 7% coupon rate. Interest is paid annually and the required rate of return is 6% for these bonds.
-Refer to Exhibit 12-2. What is the price of the Talmart corporate bonds?
A) $965.63
B) $966.13
C) $1,034.65
D) $1,135.10
E) $1,051.97

Question

Quizplus · Accepted Answer

The price of a bond is calculated by discounting the future cash flows (interest payments and the principal repayment at maturity) back to their present value using the required rate of return. Here, the annual interest payment is $70 (7% of $1,000), and the face value is $1,000. Using the required rate of return of 6% to discount these cash flows back to their present value, the correct price is $1,034.65. This calculation involves the present value of an annuity formula for the interest payments and the present value formula for the single sum of the face value at maturity.

Exhibit 12-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)