Question

Five years ago, you purchased a $1,000 corporate bond issued by general electric. the interest rate for the bond was 4 percent. today comparable bonds are paying 5 percent. what is the approximate dollar price for which you could sell your general electric bond?

Answer 1

We use the compounding interest formula in economics to determine the future worth of the value given the present value and the rate of interest. The applicable formula is F = P*(1+i) ^n where is the rate of interest, n is the number of years, F is the future worth and P is the present worth. Higher interset rate, investment time and present worth all incurs positive increase to the future worth of the value. The computations are

For the first 4 years,
F1 = $1000 *(1+0.04)^4
F1= 1169.86$
on the 5th year then,
F2 = 1169.86$*(1.05)
F2 = 1228.35$

The final investment amount after the 5th year is $1228.35