How much is a bond worth today if it pays $20 in coupon payments at the end of each year for 4 years and $1,000 at the end of the fourth year, if the interest rate is 5%?

Question

Quizplus · Accepted Answer

To calculate the present value or worth of a bond, we need to discount each future cash flow back to the present using the given interest rate. We can use the following formula:
PV = C/(1+r)^1 + C/(1+r)^2 + C/(1+r)^3 + C/(1+r)^4 + FV/(1+r)^4
where PV is the present value, C is the annual coupon payment, r is the interest rate, and FV is the face value or the amount received at maturity. Substituting the given values, we get:
PV = 20/(1+0.05)^1 + 20/(1+0.05)^2 + 20/(1+0.05)^3 + 20/(1+0.05)^4 + 1000/(1+0.05)^4
PV = 18.99 + 18.06 + 17.17 + 16.33 + 822.96
PV = $893.62
Therefore, the bond is worth $893.62 today. Option B is the correct answer.

How Much Is a Bond Worth Today If It Pays