Final answer:
When the market interest rate is higher than the bond's interest rate, the bond's market value will be lower than its face value. The approximate market value of the bond in question is $923.
Step-by-step explanation:
When the market interest rate is higher than the interest rate on the bond, the bond's market value will be lower than its face value. In this case, since comparable bonds are paying 13% interest and the bond in question pays 12% interest, we would expect to pay less than $1,000 for the bond.
Given that an alternative investment at 12% interest would require an investment of $964 to accumulate $1,080 (the final interest payment plus the return of the principal) in a year, the bond's value would not exceed $964. This is because the bond's future payments should be discounted at the market rate to reflect their present value.
We can use the formula for the present value of a bond to calculate the approximate market value. The formula is:
Market Value = Future Value / (1 + Interest Rate)^n
Using this formula, the market value of the bond would be approximately $923.