Question

Manuel wants to buy a bond that will mature to 5000 in eight years. How much should he pay for the bond now if it earns interest at a rate of 3.5% per year, compounded continuously?

Answer 1

$3,778.92

Explanation:

You want to know the present value of a $5000 bond that earns 3.5% interest compounded continuously for 8 years.

Compound interest

The compound interest formula is ...

FV = PV(e^(rt))

Filling in the values we know gives us ...

5000 = PV(e^(0.035×8)) ≈ 1.3231298·PV

Then the present value is ...

PV = 5000/1.3231298 ≈ $3778.92

Manuel should pay $3778.92 for the bond.

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