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19 November, 14:04

Suppose a State of New Mexico bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today

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  1. 19 November, 16:35
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    The bond worth as at today is $6,335.

    Explanation:

    Annuity factor @ 5.5% at year 8 = (1 - (1+5.5%) ^-8) /.055 = 6.335

    Hence, Present Value of $1000 payable in eight year time = 6.335 * $1000

    = $6,335

    Hence, the bond value as at today is $6,335.

    This calculation is done assuming there is no redemption value.
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