A firm issues a $10 million bond with a 6% coupon rate, 4-year maturity, and annual interest when market interest rates are 7%… If the market rate changes to 8%, the book value of the bond at the end of the first period will be: A. $9,484,581 B. $9,661,279 C. $9,737,568 D. $9,745,959 I got A, however, the book states that it is C. What am I doing wrong? Below are my inputs: N = 3 I = 8% PMT = ($600,000) FV = ($10,000,000) PV = $9,484,581 Thanks in advance, TheChad
Never mind…I was calculating market value as opposed to book value.
Yep - need to remember to price an initial liability based on the market rate at issuance. Any changes to market rates thereafter create the potential for a refinancing which will result in an economic gain and either an accounting gain/loss.