Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond is calculated as the:
A)present value of $10,000 to be received in 5 years plus the present value of $700 per year for 5 years.
B)face value of the bonds,$10,000.
C)amount investors would have to pay to earn 7% interest.
D)amount investors would have to pay to earn an average of the stated interest rate and the market interest rate.

Question

Quizplus · Accepted Answer

The bond issue price represents the amount that investors are willing to pay on the issue date in exchange for the cash payments that the company promises to make over the life of the bond.The cash payments include interest of $700 per year (or $10,000 × 0.07 × 12 / 12)and the amount paid at maturity,which is the face value of $10,000.Theoretically,the issue price is based on a mathematical calculation (called a present value)of both amounts.

Your Company Issues a 5-Year Bond with a Face Value