Homework Answers
When bonds are paying no interest, investors will be willing to earn atleast the market rate of interest.
so they will pay a less price than what they will receive at maturity .
the price that investors will pay today is known as presentvalue of bonds.
the amount that they will receive in future is Future value
and the difference between PV and FV is actually due to interest earned by investors.
therefore value of bond or the price paid by Joey today for bonds =
PV= FV/(1+r/n)t*n
PV= present value
FV= future value/Face value or value at maturity
r= rate of interest
t= no. of years
n= no. of compounding periods each year
FV= 270,000
R= 10%
n= 1 as interest is compounded annually
t= 20 years that is no. of years starting May1, 2021 to May 1, 2041
therefore value of bonds that Joe will pay=
270,000/(1.10)20=
$40,133.78
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