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You are considering buying bonds in ACBB, Inc. The bonds have a par value of $1,000...

You are considering buying bonds in ACBB, Inc. The bonds have a par value of $1,000 and mature in 26 years. The annual coupon rate is 12.0% and the coupon payments are annual. If you believe that the appropriate discount rate for the bonds is 10.0%, what is the value of the bonds to you?

$936.83
$1293.15
$842.09
$1183.22
$1243.68
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Answer #1
The value of a bond is the sum total of the PV of the expected cash
flows from the bond, if it is held till maturity, the discount
rate being the market interest rate of 10%:
The expected cash flows from the bond are:
*the maturity value of $1000, receivable at EOY 26, and
*the annual interest payments of $120 for 26 years,
which constitutes an annuity.
Value of the bond = 1000/1.10^26+120*(1.10^26-1)/(0.10*1.10^26) = $       1,183.22
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