A 1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bonds coupon rate is 7.4%. What is the fair value of this bond?

ANSWER

Expert Matthew Peterson's Answer:

The question is asking what the fair value of the bond is. Typically, when one thinks of fair value, the value is being based on the market relative to investment alternatives. However, in this scenario, an investor is requiring a return on the investment of 9%. So with that in mind, the investor would need to purchase this bond for ~$897 in order for the investment to yield them the desired 9% rate of return.

Matthew Peterson, CPA

Washington

4 yrs experience

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15 Ans.