This Question: 1 pt 1 of 40 (0 complete) This Test: 40 pts possible Question Hel

Question

This Question: 1 pt 1 of 40 (0 complete) This Test: 40 pts possible Question Help lue) The Kumar Corporation is planning on issuing bonds that pay no interest but can be converted into $5,000 at maturity 14 years from their purchase. To price these bonds competitively with other bonds of equal risk, it is determined that they should yield 7 percent, compounded annually At what price should the Kumar Corporation sell these bonds? Kumar Corporation should sell these bonds at s(Round to the nearest cent) Enter your answer in the answer box

Explanation / Answer

The only inflow bond will generate is at the maturity, $5000.

We need t discount $5000 using 7% as discount rate to find the price of the bond.

Present value is the present worth of cash that is to be received in the future, if future value is known, rate of interest in r and time is n then PV is

PV= FV/ (1 + r)^n

Where,

FV= 5000

r= 0.07

n= 14

Let's put all the values in the formula

= 5000/ (1 + 0.07)^14

= 5000/ (1.07)^14

= 5000/ 2.5785

= 1939.11

So price off the bond is $1939.11

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