Question

Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Answer 1

Answer:

Explanation:

The market value of debt is the present value of all future cash flows in servicing  the debt.

we need to identify the present value of the future cash flows as follows

Year     no of receipts    Cash flow           Discount factor      present value

1-7               7                        70                     5.1185                     358.296

7                 1                       1000                   0.5649                    564.926  

                             Present Value                                                 923.222

Annuity= P=R(1+(1+i )^-n) /i

Annuity= P=70(1+(1+8.5%)^-7/8.5% = 5.1185

Compound = S=P(1+i)

Compound =P=1000/(1+8.5%)^7    =  0.5649

the value of the bond is = 923.222