A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

Question

Quizplus · Accepted Answer

The correct way to find the present value of a bond is to discount each payment using the appropriate discount rate (r) and then add all the present values together. 
Using the formula for present value of a single payment: PV = FV / (1+r)^n
PV of $500 payable in one year:
PV = $500/(1+r)^1
PV of $10,500 payable in two years:
PV = $10,500/(1+r)^2
Adding these two present values together, we get:
PV = $500/(1+r)^1 + $10,500/(1+r)^2
Simplifying this expression gives us answer choice B.

A Bond Promises to Pay $500 in One Year and $10,500