Suppose a U.S. Treasury bond promises to pay $9,780.13 in three years. If bonds of this type are generating a 4% annual return, how much would you pay for this bond today?
A) $8,429.71
B) $11,001.32
C) $8,694.50
D) $9,112.78

Question

Quizplus · Accepted Answer

The formula to calculate the present value of a bond is:
PV = FV / (1 + r)^n

Where:
PV = Present Value
FV = Future Value
r = Rate of Return
n = number of periods

In this case, FV = $9,780.13, r = 4%, and n = 3 years.

Plugging these values into the formula, we get:
PV = $9,780.13 / (1 + 0.04)^3
PV = $8,694.50

Therefore, the best choice is C, $8,694.50.