Based on the terms of a bond, it pays a holder $62,500 three years after it...

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Based on the terms of a bond, it pays a holder $62,500 three years after it...

Based on the terms of a bond, it pays a holder $62,500 three years after it is issued. The stated interest rate on this bond is 4%, which is commensurate with the market interest rate. What is the present value of this bond? Assume annual compounding.

business accounting

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Answer 1

Answer #1

Solution:

Using the time value of money equation,

Future Value = Present Value * ( 1 + r ) ^ n

Here,

r is the annual interest rate on the bond

n is number of years ( life of the bond )

Future Value of bond is $62500

62500 = Present Value * ( 1 + 0.04 ) ^ 3

Present Value = 62500 / 1.124864

= $55562.27

Therefore, Present Value of the bond is $55,562.27

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Answer 2

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Based on the terms of a bond, it pays a holder $62,500 three years after it...

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