If the market interest rate stays at i = 10% over the next four years, what is the net present discounted value of a bond that pays $100 in coupon payments for each of the next four years and has a face value of $1,000?

Question

Quizplus · Accepted Answer

To calculate the net present discounted value, we need to discount each of the cash flows back to the present using the given interest rate of 10%. Using a financial calculator or Excel, we can calculate the present value of the bond as follows:

PV = (100/1.1) + (100/1.1^2) + (100/1.1^3) + (1,100/1.1^4)

PV = $909.09

Since the face value of the bond is $1,000, we add this to the present value of the coupon payments to get the net present discounted value of the bond:

Net present discounted value = $909.09 + $1,000 = $1,909.09

Therefore, the best choice is B, which is $1,000.

If the Market Interest Rate Stays at I = 10