Question

General MathematicsProblem:A bond promises to pay the bondholder equal payments of ₱5,000 in six-month intervals for 20 years. If the face amount is ₱450,000, what is the fair price of the bond? Assume that the market rate is 2% compounded annually.

Answer 1

First, we will determine the amount paid in a year. Since there are equal payments of 5000 in six months intervals we have that in a year there will be:

`5000*2=10000`

That means that we have 10000 per year. Now we multiply by the number of years to get the total payments:

`10000*20=200000`

Therefore, the total amount paid will be 200000.

Now we subtract the total payments from the face amount and we get:

`450000-200000=250000`

Now, since the market rate is 2% we get the 2% from the 250000:

`250000*(2)/(100)=5000`

Therefore, the fair price is 5000.