How much is a bond that pays $20 in interest payments for 4 years and $1000 at the end of the fourth year worth if the interest rate is 5%?
A)$822.70
B)$893.62
C)$1070.92
D)$1080

Question

Quizplus · Accepted Answer

To find the present value of the bond, we need to calculate the present value of the interest payments and the present value of the principal payment.

Present value of interest payments:

PV = C*[1-(1+r)^(-n)]/r
PV = 20*[1-(1+0.05)^(-4)]/0.05
PV = $72.31

Present value of principal payment:

PV = FV/(1+r)^n
PV = 1000/(1+0.05)^4
PV = $822.62

Total present value of the bond:

PV = $72.31 + $822.62
PV = $894.93

Therefore, the bond is worth $894.93, which is closest to option B) $893.62.

How Much Is a Bond That Pays $20 in Interest