Question

Suppose a State of New Mexico bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today

Answer 1

Answer:

The bond worth as at today is $6,335.

Explanation:

Annuity factor @ 5.5% at year 8 = (1-(1+5.5%)^-8)/.055= 6.335

Hence, Present Value of $1000 payable in eight year time = 6.335* $1000

=  $6,335

Hence, the bond value as at today is $6,335.

This calculation is done assuming there is no redemption value.