Suppose that the price of a bond is equal to the sum of the present value of its future payments.Suppose further that the bond pays $50 today,$50 one year from today,and $1,050 two years from today.What is the price of this bond if the interest rate is 5 percent?
A)$1,000
B)$1,050
C)$1,100
D)None of the above is correct.

Question

Quizplus · Accepted Answer

To find the price of the bond, we need to discount each future payment to its present value using the given interest rate. 
PV of $50 today = $50/(1+0.05)^0 = $50
PV of $50 in one year = $50/(1+0.05)^1 = $47.62 
PV of $1,050 in two years = $1,050/(1+0.05)^2 = $952.38 
The price of the bond is the sum of these present values:
$50 + $47.62 + $952.38 = $1,050. Therefore, the correct option is B.

Suppose That the Price of a Bond Is Equal to the Sum