How much is a bond worth if it pays $20 in coupon payments at the end of each year for 4 years and $1,000 at the end of the fourth year, if the interest rate is 5%?

Question

Quizplus · Accepted Answer

We can use the formula for the present value of a bond:
PV = (C/1+r) + (C/1+r)^2 + (C/1+r)^3 + (F/1+r)^n
where C is the coupon payment, r is the interest rate, F is the face value (or the principal) and n is the number of years.

So, substituting the values given:
PV = (20/1+0.05) + (20/1+0.05)^2 + (20/1+0.05)^3 + (1000/1+0.05)^4
PV = 18.91 + 17.97 + 17.07 + 738.67
PV = $892.62

Therefore, the bond is worth $892.62. Choice B is the closest answer.

How Much Is a Bond Worth If It Pays $20