Question

b) A government bond that originally cost $5000 with a yield of 6% (simple interest) has 5 years left before redemption.

i. Determine its present value if the prevailing rate of interest is 10%. Briefly explain the steps in your own words.

ii. Is it worth purchasing this bond? Provide your own reasoning.

Answer 1

i. $PV = 300*((1-(1+0.1)^{-5})/0.1) + 5000/(1+0.1)^5 = 4,241.84.$

ii. It worth purchasing this bond, because the current price of the bond is below its face value.