Question

Darren is considering adding three one‑year bonds to his portfolio. The face value on each bond is equal to $1,000.

If the current market interest rate is 44%, determine the present value (PV) of each bond. Enter your answers to two decimal places.

	Face Value	Coupon
ABC Bond	$ 1,000	4%
DEF Bond	$ 1,000	5%
GHI Bond	$ 1,000	3%

PV ABC : $

PV GHI: $

PV DEF: $

Answer 1

Solution:-

Calculate the present value of ABC bond:-

Present value (ABC) Bond = Principle Amount / (1 + i) + Coupon / (1 +i)

                                                   = $1000 / (1 + 0.04) + 4% of 1000 / (1 + 0.04)

                                                   = $1000 / (1 + 0.04) + 40 / (1 + 0.04)

                                                   = 961.54 + 38.46

                                                   = 1000

Present value (GHI) Bond = Principle Amount / (1 + i) + Coupon / (1 +i)

                                                   = $1000 / (1 + 0.04) + 3% of 1000 / (1 + 0.04)

                                                   = $1000 / (1 + 0.04) + 30 / (1 + 0.04)

                                                   = 961.54 + 28.85

                                                   = 990.39

Present value (DEF) Bond = Principle Amount / (1 + i) + Coupon / (1 +i)

                                                   = $1000 / (1 + 0.04) + 5% of 1000 / (1 + 0.04)

                                                   = $1000 / (1 + 0.04) + 50 / (1 + 0.04)

                                                   = 961.54 + 48.08

                                                   = 1009.62