Your aunt gives you a PepsiCo bond with face value of $5,000.It will mature in two years.Currently,the interest rate is 10 percent (0.10)per year.How will the value of the bond change if the interest rate falls to 5 percent tomorrow morning?

Question

Quizplus · Accepted Answer

To determine the change in the value of the bond, we need to calculate the present value of the bond at both the current interest rate of 10% and the new interest rate of 5%.

First, we calculate the present value of the bond at the current interest rate of 10% using the present value formula:

PV = FV / (1 + r)^n

where PV is the present value, FV is the face value, r is the interest rate, and n is the number of periods.

PV = $5,000 / (1 + 0.10)^2 = $4,132.23

Next, we calculate the present value of the bond at the new interest rate of 5% using the same formula:

PV = $5,000 / (1 + 0.05)^2 = $4,535.13

The change in the value of the bond is the difference between the present values at the two interest rates:

$4,535.13 - $4,132.23 = $402.90

Therefore, the answer is B: It will rise by $402.90.

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