Suppose you purchase a bond with a 5 percent risk-free rate that matures in three years.The bond pays $250 at the end of each year and a principal amount of $2,000 on maturity.The present value of the bond is ?

Question

Quizplus · Accepted Answer

To calculate the present value of the bond, we need to discount the cash flows back to their present values using the formula:

PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + FV / (1+r)^3

where: 
CF1 = $250
CF2 = $250
CF3 = $250
FV = $2,000
r = 5%

Plugging in the values, we get:

PV = $250 / (1+0.05)^1 + $250 / (1+0.05)^2 + $250 / (1+0.05)^3 + $2,000 / (1+0.05)^3 
PV = $229.35 + $215.51 + $202.90 + $1,750.74 
PV = $2,398.5

Therefore, the present value of the bond is $2,398.5, which is closest to option B, $2,408.51.

Suppose You Purchase a Bond with a 5 Percent Risk-Free