Question

At the beginning of 2015, Mary purchased a 3-year CD for $8,760. The maturity value of the certificate was $10,000 and it was to yield 4.5%. She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000. Mary must recognize $1,240 of income from the certificate of deposit in 2015, and $3,600 from the Series EE bonds in 2024.

Which of the following statements regarding Mary's investments is correct based on the provided information?
A) Mary's 3-year CD matured at a rate of 5.5%.
B) The maturity value of Mary's Series EE bond is $6,400.
C) Mary recognized $1,240 of income from the Series EE bonds in 2015.
D) The maturity period of Mary's 3-year CD was 4 years.

Answer 1

The correct answer is that Mary's Series EE bond has a maturity value of $10,000 which will be recognized in 2024. The other statements provided are incorrect based on the given values and periods. Examples using bond present value calculations with different discount rates illustrate the concepts of interest and market conditions.

Step-by-step explanation:

Based on the information provided about Mary's investments, the correct statement is that the maturity value of Mary's Series EE bond is $10,000, which will be recognized in 2024. The maturity period of Mary's 3-year Certificate of Deposit (CD) is not 4 years because it was purchased at the beginning of 2015 and should mature in 3 years, which would be the beginning of 2018. Regarding the rate of the CD, the maturity value being $10,000 and the purchase amount being $8,760 with a yield of 4.5% does not support the claim that the CD matured at a rate of 5.5%. Moreover, Mary's income recognition of $1,240 in 2015 pertains to the CD, not the Series EE bond.

Using the example of the two-year bond with an interest rate of 8%, we can calculate its present value when the discount rate is 8% and then recalculate it for a discount rate of 11%. This helps understand how the present value of a bond decreases when the discount rate (or prevailing interest rate in the economy) increases, which is relevant in understanding the bond market and investment decisions.