A bond has a face value of 1,000 dollars.It will pay 100 dollars in interest at the end of every year for the next 44 years.At the time of the final interest payment, 44 years from now, the company that issued the bond will redeem the bond at face value.That is, the company will buy back the bond from its owner at a price equal to the face value of the bond.If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

Question

Quizplus · Accepted Answer

The bond pays $100 annually for 44 years and $1,000 at the end. The present value of these cash flows at a 10% discount rate equals the face value of $1,000, so a rational investor would pay $1,000.

A Bond Has a Face Value of 1,000 Dollars