Question

What is the fair market value of a bond with the following features: (1) par value of $1000, (2) annual coupon payment of $35, and (3) 9-year maturity? Assume that current interest rates are 4%.

A. $1158.50.
B. $1099.00.
C. $991.00.
D. $962.83.

Answer 1

The fair market value of the bond is $1158.50.

Step-by-step explanation:

The fair market value of a bond can be calculated using the present value of future cash flows. In this case, the bond has a par value of $1000, annual coupon payment of $35, and a 9-year maturity. The current interest rate is 4%. To find the fair market value, we will discount the future cash flows using the interest rate. Here's how:

1. Calculate the present value of the annual coupon payments. Since the coupon payment is $35 per year, we can calculate the present value factor using the formula: PV factor = 1 - (1 / (1 + r) ^ n), where r is the interest rate and n is the number of years.
2. Calculate the present value of the final payment at maturity. The final payment will be the sum of the par value ($1000) and the last coupon payment. We can calculate the present value factor using the same formula as above.
3. Add the present values of the coupon payments and the final payment to get the fair market value of the bond.
4. Using the formula for the present value factor, we can calculate the fair market value of the bond as $1158.50.