Posted in Finance, Accounting and Economics Terms, Total Reads: 1038
Bond is a long-term debt instrument or security. It can be said to be contract where the issuer of the security promises the buyer to pay an interest at regular intervals over its maturity period and the principal is paid at the time of security.
Suppose the government is proposing to sell a 5-year bond of Rs 1,000 at 8 per cent rate of interest per annum. The bond amount will be amortized (repaid) equally over its life. If an investor has a minimum required rate of return of 7 per cent, what is the bond’s present value for him?
The outward flow during the first year including the payment of interest is 200+80=280
The payment during second year = 200(Principal amt) +64 (Discounted)
The sum of such flow will value make the present value as 1025.66 Rs.