A 10-year bond pays 5% on a face value of $1,000. If similar bonds are currently yielding 10%, what is the market value of the bond? Use annual analysis. Use time value of money tables in Appendix B and Appendix D.
A) $693.25
B) $386.00
C) $3,390.85
D) $1,386.09

Question

Quizplus · Accepted Answer

The market value of the bond can be calculated using the present value of its future cash flows, which include the annual interest payments and the principal amount at maturity. Given a 10-year bond with a 5% coupon rate on a $1,000 face value, the annual interest payment is $50. If similar bonds are yielding 10%, we use this as the discount rate. The present value of the $50 annual payments for 10 years at a 10% discount rate (using a present value of an annuity table) plus the present value of the $1,000 principal payment at the end of 10 years (using a present value table) gives us the market value of the bond. The correct calculation aligns with the value given in option A, $693.25.

A 10-Year Bond Pays 5% on a Face Value of $1,000