Question

Compute the market value of a bond given the following:

face value = $1,000

annual payment =$101

years until maturity = 11

and the company has a cost of debt (Kd) = 8.4%

(Round your answer to the nearest cent)

Answer 1

The market value of the bond is computed as shown below:

= Present value of annual payment + Present value of face value

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the market value of the bond will be as follows:

= $ 101 / 1.084¹ + $ 101 / 1.084² + $ 101 / 1.084³ + $ 101 / 1.084⁴ + $ 101 / 1.084⁵ + $ 101 / 1.084⁶ + $ 101 / 1.084⁷ + $ 101 / 1.084⁸ + $ 101 / 1.084⁹ + $ 101 / 1.084¹⁰ + $ 101 / 1.084¹¹ + $ 1,000 / 1.084¹¹

= $ 1,119.04 Approximately

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