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A bond pays $1,000 at the end of each year for 5 years plus an additional $5,000 when the bond matures at the end of 5 years. What is the most you would be willing to pay for this bond if your opportunity cost of capital is 5%?

Respuesta :

Answer:

The most I would pay for the bond is $8,247.11 .

The amount represents the present  value of the future cash flows receivable from the bond issuer from year 1 to 5.

Explanation:

The discounting formula I adopted is given Present Value=Future Value/(1+r)^n

r=rate of 5% i.e the opportunity cost of capital

n=the investment time horizon

The detailed calculation is found in the attached.

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