What is the present value of the principal amount of Dineth’s 8%, $10,000 semi-annual pay bond with 3 years remaining to maturity if similar bonds are yielding 6%?
Feedback: This is a problem of solving for the present value of a lump sum received at some future date (i.e., upon maturity). The formula for the present value of a principal amount, as presented in the textbook, is:
PV = (FV ÷ (1 + r)n)
FV = the future value to be received (i.e., the principal of the bond) = $10,000
n = the number of compounding periods until maturity = 6, calculated as (3 years × 2 payments/year)
r = discount rate that corresponds to compounding period = 3% or 0.03, calculated as (6% ÷ 2)
Using the formula, the present value of the principal amount is $8,374.84, calculated as:
PV = $10,000 ÷ (1 + 3%)6