Suppose a State of New Jersey bond will pay $1,000 five years from now. If the going interest...

Question:

Suppose a State of New Jersey bond will pay $1,000 five years from now. If the going interest rate on these 10-year bonds is 4.1%, how much is the bond worth today?

a) $675.79

b) $669.10

c) $817.99

d) $628.96

e) $749.39

Time Value of Money

This is a concept that is very common in finance that asserts that a sum of money today is worth much more than the same amount in the future because of the earning capacity of money. Money received at present can be invested to earn more return and the prevailing interest rate.

Answer and Explanation:

The present value = Future amount * Present value interest factor

Present value interest factor = (1+r)^-n

The present value = 1,000*(1+0.041)^-5 = 817.99


Learn more about this topic:

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How to Calculate Net Present Value: Definition, Formula & Analysis

from Financial Accounting: Help and Review

Chapter 5 / Lesson 20
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