If a bond offers $2,000 in interest payments at the end of each of next 5 years and a repayment of $10,000 also at the end of the 5 years and the current discount rate is 3 percent, what is the market price for the bond?
A)$12,874
B)$7,593
C)$18,256
D)$17,786

Question

Quizplus · Accepted Answer

The market price of the bond can be calculated using the present value formula for each cash flow (interest payments and principal repayment) and summing them up. The present value (PV) of the interest payments is calculated using the formula PV = PMT * [(1 - (1 + r)^-n) / r], where PMT is the annual payment ($2,000), r is the discount rate (3% or 0.03), and n is the number of periods (5 years). The present value of the principal repayment is calculated using the formula PV = F / (1 + r)^n, where F is the future value ($10,000). Adding these two present values gives the market price of the bond.

If a Bond Offers $2,000 in Interest Payments at the End