The present value of the Gecko bonds can be calculated by taking the present value of the 8 annual payments, discounted by the market rate of interest of 6%.
Market rate is the current rate that is being charged for a good or service in the marketplace. It is the rate that buyers and sellers agree upon for a given product or service and is determined by prevailing supply and demand. Market rate reflects the current competitive environment and can vary from one marketplace to another. Market rate is also known as the prevailing market rate, market price, or spot rate.
The annual coupon payments are $70 ($1,000 x 7%), and the present value of 1 payment, discounted by 6%, is $65.59 ($70 / 1.06).
Therefore, the present value of the 8 payments is $524.71 ($65.59 x 8).
The present value of the Gecko bonds is $524.71 ($524 rounded to the nearest dollar).
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