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 per cent and has a maturity of three years. The current discount rate is 10 per cent. 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 discount all three future cash flows (annual coupon payments of $8 000 and the final repayment of $100 000) to their present value and add them up. Using the formula for present value of a bond, we get:

PV = (8 000/1.1) + (8 000/(1.1^2)) + (108 000/(1.1^3))

PV = 7 272.73 + 6 612.15 + 79 141.42

PV = 92 026.30

Therefore, the current price of the security is $92 026.30, which matches answer choice B.

Consider a Security with a Face Value of $100 000