To illustrate the traditional discounted cash flow approach, lets assume that Company A has issued a 7% bond that is due in 10 years and has a face value of $400. Assume further that the risk-adjusted market rate that reflects the credit risk of Company A is 7%. This rate would be the rate that the market would demand of Company A, given the specific credit risk. The credit risk is the risk that the company will not be able to repay the bond. This would be influenced by factors such as the economy (whether things are good or bad), the companys business model (whether it is sustainable or not), and the companys cash position. If the market feels that the company is riskier, then the market will demand a premium.

How would you calculate the present value of the bond (fair value)?(Round present value factor calculationsto 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places, e.g. 5,275.)

Click here to view Table A.2 - PRESENT VALUE OF 1 - (PRESENT VALUE OF A SINGLE SUM) Click here to view Table A.4 - PRESENT VALUE OF AN ORDINARY ANNUITY OF 1