A major manufacturer is re-evaluating 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 per cent coupon rate (paid quarterly) and a par value of £1000. The required rate of return is 10 per cent. What is the current value of these securities?
A) £900.17
B) £1151.92
C) £972.52
D) £1113.63
E) £904.00

Question

Quizplus · Accepted Answer

The current value of the bond can be calculated using the present value of annuity formula for the coupon payments and the present value of a lump sum for the par value. The bond pays £20 quarterly (8% annual coupon rate / 4 quarters * £1000 par value), and the required rate of return is 2.5% per quarter (10% annual required rate / 4 quarters). The present value of the bond is the sum of the present value of the annuity of the coupon payments and the present value of the par value, which calculates to approximately £900.17.

A Major Manufacturer Is Re-Evaluating Its Bonds Since It Is