Question

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond?

Answer 1

Answer: PV = 872

Explanation:

Given:

Years to maturity (n) = 10

Coupon rate (r) = 7%

Let's assume the annual payments to be $1000

∴ Annual coupon = Annual payments × Coupon rate (r)

= $1,000 × 0.07

= $70

Interest rate (i) = 9%

We'll compute the present value using the following formula:

Present Value = $\frac{Annual\ payment}{(1 + r)^{n} }$

PV = 871.65