Question

An investor purchases a 10-year, $1,000 par value bond that pays annual interest of $100. If the market rate of interest is 12 percent, what is the current market value of the bond?

a) $887
b) $950
c) $1,000
d) $1,100

Answer 1

To find the current market value of the bond, calculate the present value of the future cash flows using the present value formula. The current market value of the bond is $950.

Step-by-step explanation:

To calculate the current market value of the bond, we need to discount the future cash flows of the bond back to their present value. Since the bond pays annual interest of $100, and the market rate of interest is 12 percent, we can use the present value formula to find the current market value of the bond.

Present value of the bond = (Annual interest payment / Market interest rate) * (1 - (1 / (1 + Market interest rate) ^ Number of years)) + (Par value / (1 + Market interest rate) ^ Number of years)

By plugging in the values, the current market value of the bond is $950. Therefore, the correct answer is (B) $950.