On January 1, a Company Issues 8%, 5 Year, $300,000

question 222

Multiple Choice

On January 1, a company issues 8%, 5 year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables: What is the issue (selling) price of the bond?

• A)$420,000
• B)$402,362
• C)$300,010
• D)$308,107
• E)$325,592

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Definitions:

Put-Call Parity

A fundamental principle in options pricing that establishes a specific relationship between the prices of European put and call options with the same strike price and expiration date.

European Put Option

A financial contract that gives the holder the right, but not the obligation, to sell an underlying asset at a specified price on the expiration date.

Exercise Price

The price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying security.

Currency-Translated Options

Options that involve the right to buy or sell a specified amount of one currency for another at a predetermined exchange rate during a specified period.