Asked by David Williams on May 27, 2024
Verified
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?
A) $500(1 + r) + $10,500/(1 + r) 2
B) $500/(1 + r) + $10,500/(1 + r) 2
C) $11,000/(1 + r) 2
D) $500(1 + r) + $10,500(1 + r) 2
Present Value
The current value of a future sum of money or stream of cash flows, discounted at a specific interest rate.
Bond
A bond is a fixed income instrument that represents a loan made by an investor to a borrower, typically corporate or governmental.
- Compute the present value of future cash flows to assess investment opportunities.
Verified Answer
SL
Shaee LoveeMay 31, 2024
Final Answer :
B
Explanation :
The correct way to find the present value of this bond is to discount each future payment by the interest rate (r) for the period until it is received. This is represented by the formula $500/(1 + r) for the payment in one year and $10,500/(1 + r)^2 for the payment in two years, which matches option B.
Learning Objectives
- Compute the present value of future cash flows to assess investment opportunities.