Question

Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today

Answer 1

Price of Bond = 585.43

Step-by-step explanation:

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

The question does not provide information about interest payment therefore the price of the bond is the present value.

PV of redemption Value

PV = F × (1+r)^(-n)

F-1000, r-0.055, n- 10 ×2

PV = 1,000 × 1.055^(-10)

PV = 585.43

Price of Bond =$ 585.43