Question

For each of the following, compute the present value: Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. For each of the following, compute the future value: Note: Do not round intermediate calculations and round your answers to 2 decimal

Answer 1

To calculate the present value of a bond, use the formula PV = FV / (1 + i)^n, where PV is the present value, FV is the future value, i is the interest rate, and n is the number of periods. In the given example with an interest rate of 8%, the total present value of the bond is $3,000.

Step-by-step explanation:

To compute the present value of a simple two-year bond, we can use the present value formula. In the case of an 8% interest rate, the calculations would proceed as follows:

• For the first year interest payment of $240: PV = $240 / (1+0.08)1 = $222.22
• For the second year interest payment and the principal of $3,000: PV = ($240 + $3,000) / (1+0.08)2 = $2,777.78
• The total present value is the sum of these two figures: $3,000

If the discount rate changes to 11%, we need to adjust the calculations by using the new rate:

• First year interest payment of $240: PV= $240 / (1+0.11)1 = $216.22
• Second year interest payment and principal: PV = ($240 + $3,000) / (1+0.11)2 = $2,651.35
• The total present value at 11% discount rate: compute the sum of these two figures.