A bond will pay $40 of interest at the end of each of the next five years, plus the principal of $1,000 at the end of year five. If the required yield-to-maturity is 5% and the present market price is $935, the NPV is
A) -$22.
B) $41.
C) +$ 8.
D) +$22.

Question

Quizplus · Accepted Answer

The NPV formula is calculated as -
NPV = Present Value of Future Cash Flows - Initial Investment 
Here, the Present Value of Future Cash Flows is the Present Market Price, which is $935
The Initial Investment is not given here, but assuming it is the face value of the bond, we can calculate it as follows:
PV = FV / (1 + r)^n, where
FV = $1000 (Face Value)
r = 5% (Yield-to-Maturity)
n = 1 (Year to Maturity)
PV = $1000 / (1 + 0.05)^1 = $952.38 (approx.)
Therefore, the Initial Investment is $952.38
NPV = $935 - $952.38 = -$17.38 (approx.)
Hence, the closest answer choice is D) +$22.

A Bond Will Pay $40 of Interest at the End