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Q: FInance ( Answered 5 out of 5 stars,   0 Comments )
Subject: FInance
Category: Business and Money
Asked by: lola5-ga
List Price: $10.00
Posted: 10 Apr 2005 14:54 PDT
Expires: 10 May 2005 14:54 PDT
Question ID: 507554
What is the present value of a 10 year, pure discount bond that pays
$1,000 at maturity and is priced to yield the following rates?
a.  5 percent
b.  10 percent
c.  15 percent
Subject: Re: FInance
Answered By: omnivorous-ga on 10 Apr 2005 16:35 PDT
Rated:5 out of 5 stars
Lola5 ?

A zero-coupon bond like this sells at the present value (PV) of $1000
after 10 years.  Present values are calculated by dividing the
compounded interest.  Thus after one year at 5% interest it is:
Value / (1.05)

After two years:
Value / (1.05)* (1.05) which can also be expressed as Value / (1.05)^2

After 10 years:
Value / (1.05)^10 , where the ^ represents the power or exponent

You can figure it on a calculator easily enough.  But an Excel
spreadsheet can show you the present value of all 3 interest rates at
any point in the 10-year cycle.  I?ve posted one here and it should be
easily readable in your browser, even if you don?t have the Microsoft

PV of $1000 in 10 years

So, the correct amounts are:
A.	$1000 / (1.05)^10 = $613.91

B.	$1000 / (1.10)^10 = $385.54

C.	$1000/ (1.15)^10 = $247.18

Google search strategy:
?present value? + ?zero coupon? bond

Best regards,

lola5-ga rated this answer:5 out of 5 stars

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