Exhibit 20-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A major manufacturer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 7 years remaining till maturity. The bonds were issued with an 8% coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 10%.
-Refer to Exhibit 20-2. What is the current value of these securities?
A) $900.18
B) $1151.92
C) $972.52
D) $1113.63
E) $904.00

Question

Quizplus · Accepted Answer

The correct answer is A because the current value of the bond is $900.18. This is calculated by using the formula for the present value of a bond:PV = C * [1 - (1 + r)^-n] / r + FV / (1 + r)^nwhere:PV is the present value of the bondC is the coupon paymentr is the required rate of returnn is the number of years to maturityFV is the face value of the bondIn this case, the coupon payment is $20 (8% of $1,000), the required rate of return is 10%, the number of years to maturity is 7, and the face value of the bond is $1,000. Plugging these values into the formula, we get:PV = $20 * [1 - (1 + 0.1)^-7] / 0.1 + $1,000 / (1 + 0.1)^7PV = $20 * [1 - 0.56447] / 0.1 + $1,000 / 1.94872PV = $20 * 4.3553 / 0.1 + $1,000 / 1.94872PV = $87.106 + $513.08PV = $900.18

Exhibit 20-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)