Question

MEGA KiHf9t1OTrlg!sxsHASIS 215) An engineering strudent wishes to buy a treasury bonds worth of 10 000 OR that natures ceive 400 OR at the end of each year). If the year do you odvise ehim to boy the bonds? Assume that the face volue of the t

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Answer 1

Bond price = Present value of annual interest + Present value of redemption price (face value)

= 400 x P/A(7%, 10) + 10,000 x P/F(7%, 10)

= 400 x 7.0236** + 10,000 x 0.5083**

= 2,809.44 + 5,083

= 7,892.44

Since bond price is lower than face value, the engineer should buy the bond now at a lower price ($7,892.44) and will get a higher price after 10 years ($10,000).

**From P/A and P/F Factor tables