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Present Value and Bonds

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1. Given the following cash flows, what is the present value if the discount rate is 8%?
Yr1 $200, Yr2 $350, Yr3 $800, Yr4 $1,125
a.$1,115.07
b.$1,947.23
c.$2,165.70
d.$2,358.96
e.$2,922.62

6. A bond with an annual coupon of $100 originally sold at par for $1,000. The current market interest rate on this bond is 9%. Assuming no change in risk, this bond would sell at a __________ in order to compensate _____________________.

a. premium; the purchaser for the above market discount rate
b. discount; the purchaser for the above market discount rate
c. premium; the seller for the above market coupon rate
d. discount; the seller for the above market coupon rate
e. discount; the issuer for the higher cost of borrowing

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Solution Summary

There are two problems. Solution to first problem describes the methodology to calculate present value of given cash flows. Solution to second problem selects appropriate option based upon financial concepts related to bonds.

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1. Given the following cash flows, what is the present value if the discount rate is 8%?
Yr1 $200, Yr2 $350, Yr3 $800, Yr4 $1,125
a. $1,115.07
b. $1,947.23
c. $2,165.70
d. $2,358.96
e. $2,922.62 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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