Which of the following amounts is closest to the present value of a bond with coupon payment of $80 and a face value of $1,000? Interest payments are made at the end of each of 2 years, and the bond matures in 2 years. The spot interest rate for the first year is 10%, and the spot interest rate for the second year is 12%.
A) $910
B) $934
C) $949
D) $1,000

Question

Quizplus · Accepted Answer

The present value (PV) of the bond can be calculated by discounting the coupon payments and the face value back to the present using the respective spot interest rates for each year. The coupon payment of $80 at the end of the first year is discounted at 10%, and the coupon payment at the end of the second year, along with the face value of $1,000, is discounted at 12%. The calculation is as follows:- PV of the first coupon payment = $80 / (1 + 0.10) = $72.73 (approximately)- PV of the second coupon payment and face value = ($80 + $1,000) / (1 + 0.12)^2 = $867.20 (approximately)Adding these two present values gives us the total present value of the bond:- Total PV = $72.73 + $867.20 = $939.93 (approximately)Thus, the closest amount to the present value of the bond is $934.

Which of the Following Amounts Is Closest to the Present