Consider a coupon bond that pays $100 every year and repays its principal amount of $1,000 at the end of four years.If the annual rate of discount is 8 percent, the present value of the bond is

Question

Quizplus · Accepted Answer

To calculate the present value of the bond, we need to discount each cash flow to present value and then add up all the present values.

Using the formula for the present value of an annuity:

PV of $100 coupon payment each year for 4 years = $100 x [1 - 1/(1 + 0.08)^4] / 0.08 = $310.38

Using the formula for the present value of a future amount:

PV of $1,000 principal repayment in year 4 = $1,000 / (1 + 0.08)^4 = $683.86

The present value of the bond is the sum of these present values:

PV of bond = $310.38 + $683.86 = $994.24

Therefore, the best choice is B, which is closest to the calculated present value of $994.24.

Consider a Coupon Bond That Pays $100 Every Year and Repays