Question

Kevin wants to buy a bond that will mature to 5500 in seven years. How much should he pay for the bond now if it earns interest at a rate of 2% per year, compounded continuously? Do not round any intermediate computations, and round your answer to the nearest cent.

Answer 1

Answer:

Ans. He should pay $4,781.47  for this bond.

Explanation:

Hi, all we have to do is to bring to present value $5,500 at 2% per year compounded continuously, from year 7.

We have to use the following formula.

$PresentValue=\frac{FutureValue}{e^{rt} }$

Where:

r = the compounded continuusly compounded rate

t = time to its maturity

It should look like this.

$PresentValue=\frac{5,500}{e^{0.02*7} }=4,781.47$

So, the fair price to pay for this bond is $4,781.47

Best of luck.