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how to solve this?
If a company sold a 5 year $30,000 bond with a stated rate of 10%, which means the interest every year is $3,000, what is the value if we thought the rate should be 20%
1 Answer
- GA41Lv 76 months ago
$22,771.74
It is the present value of an annuity. The annuity is $3000/year paid over a 5 year period. Therefore, what is the present value of $3000, $3000, $3000, $3000, $3000 discounted at 20% compounded annually over a 5 year period with one payment per year. Plus the present value of $30,000 5 years in the future.
I googled an annuity table and a present value table to get the appropriate factors. The factor for discounting an annuity for 5 years at 20% is 3.58873. The present value factor for a future payment 5 years from now is .401888.
$3000 x 3.58873 = 10,766.10
$30,000 x .40188 = 12005.64
The sum of these is $22771.74
Therefore, the $30,000 bond with a 10% coupon rate is only worth $22,771.74 to me if I want to make a 20% return
