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12 January, 00:30

What is the present value (rounded to nearest dollar) of a series of bond interest payments of $2,000 each paid semiannually for 4 years when the annual interest rate is 8%?

a.$6,624

b.$11,465

c.$13,465

d.$16,000

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Answers (1)
  1. 12 January, 00:47
    0
    The correct answer is C.

    Explanation:

    Giving the following information:

    A series of bond interest payments of $2,000 each paid semiannually for 4 years. The annual interest rate is 8%

    First, we need to calculate the real interest rate:

    Interest rate = 0.08/2 = 0.04 semiannually

    Now, we need to calculate the future value of the cash flow, and then the present value.

    Future value:

    FV = {A*[ (1+i) ^n-1]}/i

    A = semi annual deposit = 2,000

    i = 0.04

    n = 2*4 = 8

    FV = {2,000*[ (1.04^8) - 1]} / 0.04 = $18,428.45

    We calculate the present value:

    PV = FV / (1+i) ^n

    PV = 18,428.45 / (1.04^8) = $13,465.49
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