ACCA FM · Chapter 13 · Question 8 of 9
A company has 5% bonds ($100 nominal) that pay interest annually and will be redeemed at a 5% premium in four years' time. Investors require a pre-tax return of 7%. Using factors of 3.387 (4-year annuity at 7%) and 0.763 (year 4 at 7%), what is the market value of each bond?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $97.05
Explanation
Market value = PV of interest + PV of redemption = 5 x 3.387 + 105 x 0.763 = 16.935 + 80.115 = $97.05. The redemption amount is $105 because of the 5% premium; using $100 gives $93.23. Investors' pre-tax required return is used because tax relief on interest benefits the company, not the investor.
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