question archive The WeLikeToStudyBonds Company issued a $1,000 par value, 14-year bond that has a 3
The WeLikeToStudyBonds Company issued a $1,000 par value, 14-year bond that has a 3
Subject:FinancePrice:2.87 Bought7
The WeLikeToStudyBonds Company issued a $1,000 par value, 14-year bond that has a 3.5% annual coupon. If the market is requiring an 7% rate of return on bonds of this level of risk:
a) (7 pts) what is the current value of the bond?
b) (3 pts) Is the bond selling at a discount or at a premium?
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Answer:
Given
Par Value F=$1000
Bond year N=14 years
Annual Coupon C=3.5%
Return on Bond r=7%
Bond Value B= C*F*(1-(1+r)^-N)/r + F/(1+r)^N
B=3.5%*1000*(1-(1+7%)^-14)/7% + 1000/(1+7%)^14
B=$693.91
Since the Bond's present value is less than its Face value or Par Value so it is selling at discount.
