The present value PV of a bond with a $1000 face value,5% coupon rate paid annually and 2 years to maturity at the interest rate p.a.6% is
A)$981.67
B)$937.17
C)$934.50
D)$1093.40

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of a bond is the sum of the present values of all the future cash flows. In this case, the future cash flows are the annual coupon payments of $50 and the face value of $1000. The present value of the annual coupon payments is calculated as follows:PV of annual coupon payments = $50 / (1 + 0.06) + $50 / (1 + 0.06)^2 = $934.50The present value of the face value is calculated as follows:PV of face value = $1000 / (1 + 0.06)^2 = $937.17The present value of the bond is the sum of the present values of the annual coupon payments and the face value, which is $934.50 + $937.17 = $1871.67.

The Present Value PV of a Bond with a $1000