Question

An investor intends purchasing a 3 years Rs.1000 bond having interest rate 10%.At what price the bond may be purchased now if it matures at par and the investor requires a rate of return of 14%.

Answer 1

Answer: The purchase value of the bond will be Rs$907.125$.

Step-by-step explanation:

Given: Bond time period of $3$ years, Face value of Rs.$1000$, interest rate @$10$%, and rate of return @$14$%.

To find The P.V. of the bond.

Solution:

The formula for calculating present value is given as  PV = FV/($1$ + i) n where P.V. = Present value,

FV = future value,

i = decimalized interest rate,

and n = number of periods.

So this can also be written as:

P.V = $\frac{100}{(1+0.14)1} +\frac{100}{(1+0.14)2}+\frac{100}{(1+0.14)3}+ \frac{1000}{(1+0.14)4}$

= $100$×$0.87719 + 100$×$0.769467 + 100$×$0.67972 + 1000$ × $0.674972$

= $87.719 + 76.947+67.497+674.972$

= $907.125$

Therefore, the purchase value of the bond will be Rs. $907.125$ or Rs. $907$( Approx.)

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