Question

Can someone please teach me how to do these?

6. A risk-free bond will pay you $1,000 in 1 year. The annual discount rate is i=19.69% compounded annually.  What is the bond’s present value?

7. A risk-free bond will pay you $1,000 in 2 years and nothing in between. The annual discount rate is i=67.5% compounded annually.  What is the bond’s present value?

Answer 1

HI,

While calculating present value we need to discount the future value with given discount rate.

in question 7.Payment after 1 year F = $1,0000

time t = 1 year

discount rate i =19.69%

present value p=?

so we will use compounded interest formula to find out bond's present value.

F =P*(1+i)^t

P = F/(1+i)^t

P = 1000/(1+19.69%)^1

P = 1000/1.1969

P = $835.49

Hence present value of bond is $835.49

in question 7 time t= 2 years

i = 67.5%

F= $1000

P = F/(1+i)^t

P =1000/(1+67.5%)^2

P = 1000/1.675)^2

P =$356.43

Hence present value is $356.43

Thanks