How much is a bond that pays $20 in coupon 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

To calculate the present value of the bond, we need to calculate the present value of the coupon payments and the present value of the face value payment.

Present value of coupon payments:
PV = (coupon payment/interest rate) x (1 - 1/(1+interest rate)^n)
where n is the number of years and PV is the present value

In this case, coupon payment is $20, interest rate is 5% and n is 4
PV = (20/0.05) x (1 - 1/1.05^4) = $70.38

Present value of face value payment:
PV = Face value/ (1+interest rate)^n
where n is the number of years and PV is the present value

In this case, face value is $1000, interest rate is 5% and n is 4
PV = 1000/(1.05^4) = $822.62

Total present value = present value of coupon payments + present value of face value payment
= $70.38 + 822.62 = $893.62

So, the bond is worth $893.62. Therefore, the best choice is B.

How Much Is a Bond That Pays $20 in Coupon