Question

1) Calculate the market value or present value of a bond that promises the payment of $1,400,000 ($1,000,000 principal and $400,000 interest), with interest calculated at the rate of 4% annually for 10 years.

Answer 1

Calculate the market value or present value of a bond that promises the payment of $1,400,000 ($1,000,000 principal and $400,000 interest), with interest calculated at the rate of 4% annually for 10 years.

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The formula for calculation

Market value of Bond = PV of Bond at discounted the payment, which is future value @ interest rate

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Future value = payment after 10 year = $1400000

Interest rate = 4%

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Use PV equation for calculation

PV = FV * ( 1 / 1 + r )^{^n}

.

Where,

PV = Market value of bond

FV = future value = promised payment of $1,400,000

r = Interest rate = 4% annually

n = number of period = 10

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( 1 / 1 + r )^{^n} = this is the equation of Present value of interest factor

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Market Value = $1400000 * ( 1 / 1 +4% )^{^10}

Market Value = $1400000 * 0.675564

Market Value = $945789.83