Question

Bond Long will pay $1 in 20 years with a discount interest rate of 5% and Bond Short will pay $1 in 5 years with a discount interest rate of 10%. Which bond has the higher present value

Answer 1

Answer:

Bond short has higher present value.

Explanation:

Below is the calculation of present value:

Present value calculation of bond long.

Future value = $1

Time = 20 years

Present value = Future Value (P/F, n, r)

Present value = 1 (P/F, 20, 5%)

Present value = 1 x 0.376

Present value = 0.376

Present value calculation of bond short.

Future value = $1

Time = 5 years

Present value = Future Value (P/F, n, r)

Present value = 1 (P/F, 5, 10%)

Present value = 1 x 0.376

Present value = 0.6209

Bond short has higher present value.