How much would you be prepared to pay for a $500 bond which comes due in 5 years and pays $80 interest annually assuming your required rate of return is 8% (pick closest answer)?
A)$740
B)$660
C)$608
D)$500

Question

Quizplus · Accepted Answer

The bond pays $80 interest annually for 5 years, giving a total of $400 in interest payments. At a required rate of return of 8%, we can use the present value formula to calculate the price of the bond:
PV = $80/(1+0.08)^1 + $80/(1+0.08)^2 + $80/(1+0.08)^3 + $80/(1+0.08)^4 + ($80 + $500)/(1+0.08)^5
PV = $63.71 + $59.05 + $54.98 + $51.47 + $384.34
PV = $613.55
Therefore, the most appropriate answer is B) $660.

How Much Would You Be Prepared to Pay for a $500