Question

Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Answer 1

Step-by-step explanation:

The market value of debt is the present value of all future cash flows in servicing the debt.

we need to identify the present value of the future cash flows as follows

Year no of receipts Cash flow Discount factor present value

1-7 7 70 5.1185 358.296

7 1 1000 0.5649 564.926

Present Value 923.222

Annuity= P=R(1+(1+i )^-n) /i

Annuity= P=70(1+(1+8.5%)^-7/8.5% = 5.1185

Compound = S=P(1+i)

Compound =P=1000/(1+8.5%)^7 = 0.5649

the value of the bond is = 923.222