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.

Answer 1

To calculate the present value of a two-year bond, issued at an 8% interest rate, you need to use the present value formula. After calculating the present values for each time period, you can add them up to get the total present value.

Step-by-step explanation:

Think about a simple two-year bond. It was issued for $3,000 at an interest rate of 8%. Thus, after the first year, the bond pays interest of $240 (which is $3,000 × 8%). At the end of the second year, the bond pays $240 in interest, plus the $3,000 in principal. To calculate the present value of this bond, we use the present value formula:

Present Value (for the 8% interest rate)

$240/(1+0.08)¹ = $222.20

$3,240 payment after the second year

$3,240/(1+ -0.08)² = $2,777.80

To get the total present value, we add up the present values for each time period: $222.20 + $2,777.80 = $3,000. Round your answer to 2 decimal places.