The price of a bond is equal to the sum of the present value of its future payments.Suppose a certain bond pays $50 one year from today,and $1,050 two years from today.What is the price of this bond if the interest rate is 5 percent?
A) $1,000
B) $1,050
C) $1,100
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The price of the bond is calculated by discounting each future payment to its present value using the interest rate. The present value of $50 received one year from today is $50 / (1 + 0.05) = $47.62. The present value of $1,050 received two years from today is $1,050 / (1 + 0.05)^2 = $952.38. Adding these gives $47.62 + $952.38 = $1,000.

The Price of a Bond Is Equal to the Sum