a)An investment pays $10,000 a
a)An investment pays $10,000 after 1 year and it pays another$8,000 after another 1 year. The interest rate is 5%. What is thepresent value of this investment?
b)A bond’s face value is the amount the issuer provides to thebondholder, once maturity is reached. A bond’s face value is$100,000 and it mature after five years. If the interest rate is1.5%, how much would you pay (at most) to purchase this bond?
Answer:
An investment pays $10,000 after 1year and it pays another $8,000 after another 1 year. The interestrate is 5%. What is the present value of thisinvestment?
Present Value
= Summation of Discounted value ofthe amount paid out at the end of each year
= > Present value(PV)
= payment after 1 year discountedat today’s value by market rate of interest + payment after twoyears discounted at today’s value
= > PV =10000/(1+0.05) + 8000/(1+0.05)2
= 10000/1.05 + 8000/(1.05)2
= 16780.05
b)A bond’s face value is the amountthe issuer provides to the bondholder, once maturity is reached. Abond’s face value is $100,000 and it mature after five years. Ifthe interest rate is 1.5%, how much would you pay (at most) topurchase this bond?
Its only viable to buy the bondwhen Bond’s purchase value today is less than or equal to (at max)the present discounted value (at the prevailing market interestrate ) of its face value paid out on maturity .
= > Bond’s at max purchase value= 100000/(1+0.015)5
= 92826.03
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