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 per cent?

Question

Quizplus · Accepted Answer

The value of the bond can be calculated using the formula:

PV = (C/r) * [1 - (1+r)^-n] + FV/(1+r)^n

where PV is the present value or price of the bond, C is the annual coupon payment, r is the interest rate per period, n is the number of periods, and FV is the face value or par value of the bond.

Substituting the given values, we get:

PV = (20/0.05) * [1 - (1+0.05)^-4] + 1000/(1+0.05)^4
PV = 893.62

Therefore, the bond is worth $893.62.

Option A is incorrect because it does not take into account the payment of $1000 at the end of 4 years. Option C and D are also incorrect as they are greater than the face value of the bond, which is not possible.

How Much Is a Bond That Pays $20 in Interest