Your company issues a 5-year bond with a face value of $10,000 and a stated inte

Question

Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond is calculated as:

A) the present value of $10,000 to be received in 5 years plus the present value of $700 per year for 5 years.

B) the face value of the bonds, $10,000.

C) the amount investors would have to pay to earn 7% interest.

D) the amount investors would have to pay to earn an average of the stated interest rate and the market interest rate.

Explanation / Answer

A. the present value of $10,000 to be received in 5 years plus the present value of $700 per year for 5 years.

Issue price of bond = interest × pvaf @5% for 5years + maturity value of bond × pvf@ 5% for 5 year

= 700 × 4.329 + 10000× .783

=$10865

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