Question

Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.4%, how much is the bond worth today?

a. $651.60
b. $684.18
c. $718.39
d. $754.31
e. $792.02

Answer 1

Answer: $651.60

Explanation:

From the question, we are informed that a State of California bond will pay $1,000 eight years from now and that the going interest rate on these 8-year bonds is 5.4%.

The worth of the bond today will then be:

FV = $1000

N = 8

I/Y = 5.4% = 0.054

We would use the formula:

= FV / (1+r)^(-N)

= $1000 / (1+0.054)^8

= $651.60