Question

Delta Corporation has a bond issue outstanding with an annual coupon interest rate of 7 percent and 4 years remaining until maturity. The par value of the bond is $1,000. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return. The bond pays interest annually.

Answer 1

The current value of the bond is $796.04

Step-by-step explanation:

The current value of a bond is the present value of all the cash inflows expected from the bond in the form of an annuity of interest payments and the term end face value payment discounted by the required rate of return or market interest rates. Thus, the current price of this bond will be,

Interest payment from the bond per year = 1000 * 0.07 = $70

The present value of ordinary annuity formula is attached in the answer.

Price = 70 * [ (1 - (1+0.14)^-4) / 0.14 ] + 1000 / (1.14)^4

Price of the bond = $796.04