Consider three bonds,from Corporation X,Corporation Y,and Corporation Z.The X and Y bonds mature in 1 year,while the Z bond matures in 2 years.The Y and Z bonds have face values of $5,000,while the X bond has a face value of $4,000.If the interest rate is 10 percent (0.10)per year,rank the three bonds from highest present value to lowest present value.

Question

Quizplus · Accepted Answer

To calculate the present value of a bond, we use the formula:

PV = FV / (1 + r)^n

where PV is the present value, FV is the face value, r is the interest rate, and n is the number of years until maturity.

For the X bond, PV = 4000 / (1 + 0.10)^1 = $3,636.36
For the Y bond, PV = 5000 / (1 + 0.10)^1 = $4,545.45
For the Z bond, PV = 5000 / (1 + 0.10)^1 + 5000 / (1 + 0.10)^2 = $9,090.91

Therefore, the ranking from highest to lowest present value is: Y, Z, X, and the best choice is C.

Consider Three Bonds,from Corporation X,Corporation Y,and Corporation Z