You are thinking about buying a $1,000 bond issued by the appalachian development authority (ada). the bond will pay $120 interest at the end of each of the next 5 years. at the end of year 6, the bond will pay $1,120 (this is its face value of $1,000 plus the interest). if the relevant discount rate is 7%, how much is the present value of the bond's future payments? (
Solution: PV at time T = expected cash flows in period T / (1 + I) to the T power where, T= time period, and I= interest Year 1 = $120 / (1.07)^1 = $ 112.15 Year 2 = $120 / (1.07)^2 = $ 104.81 Year 3 = $120 / (1.07)^3 = $ 97.96 Year 4 = $120 / (1.07)^4 = $ 91.55 Year 5 = $120 / (1.07)^5 = $ 85.56 Year 6 = $1,120 / (1.07)^6 = $ 746.30 Now to find the value of the bond:
Value = $112.15+$104.81+$97.96+$91.55+$85.56+$746.30 Value = $ 1238.33
