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Calculating the present value of a bond

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You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

A. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
B. The discount rate increases.
C. The riskiness of the investment's cash flows decreases.
D. None of the above

Suppose a State of Maryland bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

A. $651.60
B. $684.18
C. $718.39
D. $754.31

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Solution describes the steps to calculate present value of a bond.

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Please refer attached file for better understanding of formulas in MS Excel.

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.  Which of ...

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Lokesh Jain, MSc
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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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