You are thinking of purchasing a 5-year bond,with a face value of $8,000,on the secondary bond market.The bond was issued three years ago,so it will mature two years from today.If the interest rate is 10 percent (0.10)per year,what is the value of the bond?

Question

Quizplus · Accepted Answer

To calculate the value of the bond, we need to find the present value of the future payments (interest and principal) discounted at the given interest rate.

The bond has two more years to maturity, during which it will pay an annual interest of 10% of $8,000, or $800. At maturity, it will also pay the face value of $8,000.

Using the formula for the present value of an annuity and the present value of a lump sum, we get:

PV = 800 x (1 - 1/(1+0.10)^2)/0.10 + 800/(1+0.10)^2 + 8,000/(1+0.10)^2 = $6,611.57

Therefore, the best choice is A.

You Are Thinking of Purchasing a 5-Year Bond,with a Face