Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time)and also repays the face value of $2000 at the end of the third year.If the market interest rate is 6%,what is the present value of this bond?

Question

Quizplus · Accepted Answer

The present value of the bond is calculated by discounting each of the cash flows (the annual coupon payments and the face value repayment) back to the present using the market interest rate of 6%. The formula for the present value of an annuity (for the coupon payments) and the formula for the present value of a single sum (for the face value repayment) are used. The calculation is as follows:- Present value of coupon payments = $100 / 0.06 * (1 - (1 / (1 + 0.06)^3)) = $267.30- Present value of face value = $2000 / (1 + 0.06)^3 = $1679.23Adding these two components gives the total present value of the bond: $267.30 + $1679.23 = $1946.53.

Consider a Bond That Promises to Make Coupon Payments of $100