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

Question

Quizplus · Accepted Answer

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 at maturity. The present value of each cash flow is calculated by multiplying the cash flow by the present value factor. The present value factor is the present value of $1 received at the end of a given period at a given interest rate. In this case, the interest rate is 6% and the periods are 1 and 2 years. The present value factors are 0.9434 and 0.8900, respectively. The present value of the bond is therefore:PV = $50 x 0.9434 + $50 x 0.8900 + $1000 x 0.8900 = $934.50

The Present Value PV of a Bond with a Face