Electronic importers has a pure discount bond with a face value of 30,000 that m

Question

Electronic importers has a pure discount bond with a face value of 30,000 that matures in one year. The risk-free rate of return is 3.6 percent. The assets of the business are expected to be worth 29,000 or 35,000 in one year. Currently, these assets are worth 28,300. What is the current value of the bond ? Electronic importers has a pure discount bond with a face value of 30,000 that matures in one year. The risk-free rate of return is 3.6 percent. The assets of the business are expected to be worth 29,000 or 35,000 in one year. Currently, these assets are worth 28,300. What is the current value of the bond ?

Explanation / Answer

The value of assets is always expected to be increasing. hence, it is a case of risk free debt.

Current value of debt = Present value of face value at risk free rate = 30,000/1.036 = 28,957.53

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