Question

Finance,

You are considering the purchase of a Pure Discount Bond with a Face Value of $10,000, which matures in three years. If you desire a return of 3.35%, how much would you bid for the bond today? (Round your answer to two decimal places, e.g. 9274.36)

It's not 9058.76 nor 9051.38, really need help with this question can anyone tell me what am I doing wrong.

Answer 1

If both 9058.76 (corresponding to yearly compounding) & 9051.38 (corresponding to half-yearly compounding) are not the correct answers, then there could be 2 possibilities:

1. In the question, it is not mentioned yearly or annual return, just return is given to be 3.35%. So you can try it as a one-period return (that is overall 3.35% return for 3 years) . That will give the bond price= 9,675.86 using PV function.

2. If the above answer is also incorrect, there could be a possibility of a continuously compounded rate. In that case, the PV is given by the following formula:

FV= PV * e^rt

FV is 10,000, e is the exponential function, r= 3.35% (nominal periodic return) & t should be tried with t=3

This will give PV= 10000/e^(3.35%*3)

= 9043.85

Check if any of the above 2 matches with your correct answer, If not then please let me know in the comments.