If a bond offers $1,000 in interest payments at the end of each of next 5 years and a repayment of $10,000 also at the end of the 5 years and the current discount rate is 3 percent, what is the present value of the bond?
A)$13,205
B)$10,857
C)$12,569
D)$4,580

Question

Quizplus · Accepted Answer

The present value of the bond is the sum of the present values of the interest payments and the repayment. The present value of an interest payment is the interest payment divided by (1 + discount rate)^n, where n is the number of years until the payment is received. The present value of the repayment is the repayment divided by (1 + discount rate)^n, where n is the number of years until the repayment is received. In this case, the present value of the bond is:PV = $1,000 / (1 + 0.03)^1 + $1,000 / (1 + 0.03)^2 + $1,000 / (1 + 0.03)^3 + $1,000 / (1 + 0.03)^4 + $1,000 / (1 + 0.03)^5 + $10,000 / (1 + 0.03)^5= $13,205

If a Bond Offers $1,000 in Interest Payments at the End