Exhibit 20-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A major retailer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 8 years remaining until maturity. The bonds were issued with a 6.5% coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25%.
-Refer to Exhibit 20-1. What is the current value of these securities?
A) $1149.94
B) $433.15
C) $1151.92
D) $860.50
E) $863.35

Question

Quizplus · Accepted Answer

To find the current value of the bond, we use the present value formula for bonds, which accounts for the present value of the annuity (coupon payments) and the present value of the lump sum (par value at maturity). Given the bond has a 6.5% annual coupon rate (paid quarterly, so 1.625% per quarter), a par value of $1,000, 8 years to maturity (or 32 quarters), and a required return of 4.25% annually (or 1.0625% per quarter), we calculate the bond's price by discounting the future cash flows back to their present value. The correct answer reflects the calculated present value of these cash flows, indicating the bond is priced at a premium due to its coupon rate being higher than the current required rate of return.

Exhibit 20-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)