Question

your friend amita is an award-winning chef. amita wants to start her own restaurant in denver but is unable to obtain a loan from her local bank. amita has decided to issue a 1-year bond with a a face value of $13,000 and an interest rate of 4%. If you wanted to buy this bond, what would be the initial price?
a) 500
b) 12,500
c) 520
d)13,520
e)12,300

Answer 1

However, the Present value will be $ 12, 500, If Amita wants to buy the bond. Option B is the answer.

original Price means the price at which any Shares of any class are first offered for purchase or subscription. Present value( PV) is the current value of a future sum of money or stream of cash overflows given a specified rate of return. Future cash overflows are blinked at the reduction rate, and the advanced the reduction rate, the lower the present value of the future cash overflows.

Present value( PV) = C/( 1 r) n

Given,

rate of interest( r) = 4

number of times( n) = 1 time

face value( c) = $13,000

thus substituting the values in the formula we get,

PV =13 ,000/( 1+0.04) ^1

PV = 13000/1.04

PV = $12,500

So, if Amita wants to buy the bond, the original value will be $ 12,500.

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