Answer to Question #196850 in Economics for aman

Question #196850

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. (20%)


ii. Is it worth purchasing this bond? Provide your own reasoning. (10%)


1
Expert's answer
2021-05-25T14:24:09-0400

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.


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