Colby & Company bonds pay half-yearly interest of $50.They mature in 15 years and have a face value of $1,000.The market rate of interest is 8%.The market value of Colby bonds is (round to the nearest dollar)

Question

Quizplus · Accepted Answer

To calculate the market value of the bond, we need to use the present value formula:

PV = C * (1 - (1 / (1 + r)^n)) / r + FV / (1 + r)^n

Where PV is the present value, C is the coupon payment, r is the market interest rate, n is the number of periods, and FV is the face value.

In this case, we have:

C = $50 / 2 = $25 (since the coupon is paid half-yearly)

r = 8% / 2 = 4% (since it's a semi-annual rate)

n = 15 * 2 = 30 (since there are 30 half-years in 15 years)

FV = $1,000

Therefore, we can calculate the market value as:

PV = $25 * (1 - (1 / (1 + 4%)^30)) / 4% + $1,000 / (1 + 4%)^30 = $1,172.58

Rounding to the nearest dollar gives us $1,173, which is answer choice A.

Colby & Company Bonds Pay Half-Yearly Interest of $50