Question

Panera Corporation has a $12,000 pure discount bond that comes due in one year. The risk-free rate of return is 3 percent. The firm's assets are expected to be worth either $12,000 or $21,000 in one year. Currently, these assets are worth $16,000. What is the current value of the firm's debt?

		$11,320.78
		$11,763.42
		$11,890.51
		$11,650.49
		$12,547.66

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =1

Bond Price =∑ [(0*12000/100)/(1 + 3/100)^k]     +   12000/(1 + 3/100)^1

k=1

Bond Price = 11650.49