Assume the interest rate is 5%. What is the present discounted value of a $1,000 bond that pays a $50 coupon each year for 10 years?
A) $989.91
B) $999.91
C) $1,000.00
D) $1,009.99

Question

Quizplus · Accepted Answer

The present discounted value (PDV) of a bond that pays a fixed coupon each year can be calculated by summing the present value of all future coupon payments and the present value of the bond's face value at maturity. In this case, the bond pays a $50 coupon each year for 10 years and has a face value of $1,000. The PDV of the bond is calculated using the formula for the present value of an annuity (for the coupon payments) plus the present value of a lump sum (for the bond's face value). Given the interest rate is 5%, the exact calculation would show that the bond's present value is designed to be $1,000, which is its face value, assuming the market interest rate matches the coupon rate.

Assume the Interest Rate Is 5