____________ is a completely inadequate mechanism ____________________ in a modern advanced economy. Question 21 options: Curren
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Answer:
PV when interest rate is 6% = $957.88
PV when interest rate is 7%= $918
PV when interest rate is 5%= $1,000
Explanation:
The price of a bond is equivalent to the present value of all the cash flows that are likely to accrue to an investor once the bond is bought. These cash-flows are the periodic coupon payments that are to be paid annually and the par value of the bond that will be paid at the end of 5 years.
During the 5 years, there are 5 equal periodic coupon payments that will be made. Given a par value equal to $1,000, in each year, and a coupon rate equal to 5% the annual coupon paid will be = $50. This stream of cash-flows is an ordinary annuity.
The PV of the cash-flows = PV of the coupon payments + PV of the par value of the bond
Assuming the current interest rate is 6 percent
PV =50*PV Annuity Factor for 5 periods at 6%+ $1,000* PV Interest factor with i=6% and n =5
= = $957.88
The bond sells at a discount.
Assuming the current interest rate is 7 percent
PV =50*PV Annuity Factor for 5 periods at 7%+ $1,000* PV Interest factor with i=7% and n =5
= = $918
The bond sells at a discount.
Assuming the current interest rate is 5 percent
PV =50*PV Annuity Factor for 5 periods at 5%+ $1,000* PV Interest factor with i=5% and n =5
= = $1,000
The bond sells at par