Final answer:
The NPV of a bond is the sum of the present values of its future cash flows discounted at the given interest rate. Without the specific cash flow amounts or their timings, we cannot calculate the exact NPV. The value of the bond changes with varying interest and discount rates.
Step-by-step explanation:
To determine the Net Present Value (NPV) of a stream of free cash flows, we must discount them at the given rate, which in this case is 12.5%. The question involves understanding and applying the concept of present discounted value (PDV) to a series of payments from a bond over a two-year period with a specific interest rate.
Calculating NPV requires each future cash flow to be transformed into its present value. For example, if a bond pays $240 in the first year and $3,240 in the second year (the sum of $240 interest and $3,000 principal), we must discount these individual cash flows back to their present values using the given discount rate. The sum of these present values gives us the NPV of the bond.
Unfortunately, without the exact stream of cash flows or timings, we cannot give a precise value for the NPV from the provided options (a. $795.74, b. $900.00, c. $1,000.00, d. NPV not provided). However, we can use information from similar calculations to infer that the NPV changes with different interest rates and discount rates. These calculations are critical for assessing investment opportunities and the value of financial instruments.