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A four year bond with a face value of $1,000 pays $150 in interest at the end of years one, two, and three. The bond will pay $1,150 at the end of the fourth year, when it matures. If the interest rate remains constant at 7 % , what is the present value of this bond? Enter your answer rounded to the nearest penny.

Respuesta :

Answer:

$1,270.98

Explanation:

The computation of the present value of this bond is shown below:

Year Cash flows Discount rate 7% PV of cash inflows  

1          $150       0.9345794393  $140.19

2          $150       0.8734387283         $131.02

3          $150       0.8162978769         $122.44

4          $1,150       0.762895212         $877.33

Present value                           $1,270.98

The discount rate is computed by  

= 1 ÷ (1 + interest rate)^number of years

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