Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than
A)$8,225.06.
B)$7,920.94.
C)$7,672.58.
D)$6,998.98.

Question

Quizplus · Accepted Answer

The correct answer is found by calculating the present value of the $10,000 to be received in 4 years at a 6 percent annual discount rate. The formula for present value is $PV = \frac{FV}{(1 + r)^n}$, where $PV$ is the present value, $FV$ is the future value, $r$ is the annual interest rate, and $n$ is the number of years. Plugging in the given values, $PV = \frac{10,000}{(1 + 0.06)^4}$, which calculates to approximately $7,920.94. This means you would buy the bond if its price today is no greater than $7,920.94.

Suppose You Are Deciding Whether to Buy a Particular Bond