Suppose a U.S. government bond promises to pay $3.000 four years from now. If the going interest rate on 4-year government bonds is 5%. how much is the bond worth today? PV = FV, /1 + 1
Suppose a U.S. government bond promises to pay $3.000 four years from now. If the going interest rate on 4-year government bonds is 5%. how much is the bond worth today? PV = FV, /1 + 1
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Present Value of a U.S. Government Bond**
Suppose a U.S. government bond promises to pay $3,000 four years from now. If the going interest rate on 4-year government bonds is 5%, how much is the bond worth today?
The formula for calculating the present value (PV) is:
\[
PV = \frac{{FV_N}}{{(1 + I)^N}}
\]
Where:
- \( PV \) is the present value of the bond.
- \( FV_N \) is the future value, which is $3,000 in this case.
- \( I \) is the interest rate, expressed as a decimal (0.05 for 5%).
- \( N \) is the number of years until the bond matures, which is 4.
This calculation helps determine the current worth of future payments from the bond, considering the specified interest rate.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fab8a5d84-6bd6-44bd-8cca-2b90704ba9aa%2F7a679c97-d2db-45c2-9fce-3e09e83abe65%2Fop5xfwv_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Present Value of a U.S. Government Bond**
Suppose a U.S. government bond promises to pay $3,000 four years from now. If the going interest rate on 4-year government bonds is 5%, how much is the bond worth today?
The formula for calculating the present value (PV) is:
\[
PV = \frac{{FV_N}}{{(1 + I)^N}}
\]
Where:
- \( PV \) is the present value of the bond.
- \( FV_N \) is the future value, which is $3,000 in this case.
- \( I \) is the interest rate, expressed as a decimal (0.05 for 5%).
- \( N \) is the number of years until the bond matures, which is 4.
This calculation helps determine the current worth of future payments from the bond, considering the specified interest rate.
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