Consider a security with a face value of $100 000, which is to be repaid at maturity.The security pays an annual coupon of 8% and has a maturity of three years.The current discount rate is 10%.What is the security's current price (round to two decimals)?
A)$124,000
B)$95,026.30
C)$19,894.82
D)$100,000

Question

Quizplus · Accepted Answer

To calculate the current price of the security, we need to use the present value formula: PV = C/(1+r)^1 + C/(1+r)^2 + C/(1+r)^3 + FV/(1+r)^3, where PV is the present value, C is the annual coupon payment, r is the discount rate, and FV is the face value or the maturity value of the security.

Plugging in the numbers, we get:
PV = 8,000/(1+0.10)^1 + 8,000/(1+0.10)^2 + 8,000/(1+0.10)^3 + 100,000/(1+0.10)^3
PV = 7,272.73 + 6,611.57 + 6,010.52 + 71,131.48
PV = 95,026.30

Therefore, the current price of the security is $95,026.30. The best choice is (B).

Consider a Security with a Face Value of $100 000