Solved: (a) What is the present value of a $1000 bond which pays $50 a year for 10
Chapter 9, Problem 44(choose chapter or problem)
(a) What is the present value of a $1000 bond which pays $50 a year for 10 years, starting one year from now? Assume the interest rate is 5% per year, compounded annually. (b) Since $50 is 5% of $1000, this bond is called a 5% bond. What does your answer to part (a) tell you about the relationship between the principal and the present value of this bond if the interest rate is 5%? (c) If the interest rate is more than 5% per year, compounded annually, which is larger: the principal or the present value of the bond? Why is the bond then described as trading at a discount? (d) If the interest rate is less than 5% per year, compounded annually, why is the bond described as trading at a premium?
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