Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

The present value of a bond is calculated by discounting its future cash flows (interest payments and the principal repayment at maturity) back to their present value using the current market interest rate. Since the market interest rate (9%) is higher than the coupon rate (7%), the bond will sell at a discount. The present value of the bond can be calculated using the formula for the present value of an annuity (for the interest payments) plus the present value of a lump sum (for the principal repayment). The calculation confirms that the present value is closest to $872, making option A correct.

Briar Corp Is Issuing a 10-Year Bond with a Coupon