Asked by Reanna Stoops on Jun 09, 2024
Verified
Company A has a bond outstanding that pays a 7% coupon.The interest is paid annually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately?
A) $932.05
B) $932.90
C) $1,000.00
D) $1,070.24
Market Rate of Interest
The prevailing rate of interest observed in the marketplace for securities of similar risk and maturity profiles.
Bond Selling For
Bond Selling For indicates the current market price at which a bond is being traded, which can be at a discount, at par, or at a premium relative to its face value.
Coupon
A payment to the holder of a bond made periodically until the bond matures, typically representing interest on the bond.
- Gain an understanding of the basics of pricing bonds and the variables that impact the prices of bonds.
Verified Answer
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Final Answer :
B
Explanation :
To find the approximate price of the bond, we can use the formula:
Bond Price = (Coupon Payment / Interest Rate) x [1 - 1/(1 + Interest Rate)^Number of Years] + Face Value / (1 + Interest Rate)^Number of Years
Plugging in the values, we get:
Bond Price = (70 / 0.08) x [1 - 1/(1 + 0.08)^10] + 1000 / (1 + 0.08)^10
Bond Price = 875 x 0.469 + 1000 / 2.1589
Bond Price = 410.875 + 463.106
Bond Price = $873.98
Therefore, the bond should be selling for approximately $932.90, which is closest to option B.
Bond Price = (Coupon Payment / Interest Rate) x [1 - 1/(1 + Interest Rate)^Number of Years] + Face Value / (1 + Interest Rate)^Number of Years
Plugging in the values, we get:
Bond Price = (70 / 0.08) x [1 - 1/(1 + 0.08)^10] + 1000 / (1 + 0.08)^10
Bond Price = 875 x 0.469 + 1000 / 2.1589
Bond Price = 410.875 + 463.106
Bond Price = $873.98
Therefore, the bond should be selling for approximately $932.90, which is closest to option B.
Learning Objectives
- Gain an understanding of the basics of pricing bonds and the variables that impact the prices of bonds.