What is the present value (rounded to nearest dollar) of a series of bond interest payments of $2,000 each paid semiannually for 4 years when the annual interest rate is 8%?

a.$6,624

b.$11,465

c.$13,465

d.$16,000

The correct answer is C.

Explanation:

Giving the following information:

A series of bond interest payments of $2,000 each paid semiannually for 4 years. The annual interest rate is 8%

First, we need to calculate the real interest rate:

Interest rate= 0.08/2= 0.04 semiannually

Now, we need to calculate the future value of the cash flow, and then the present value.

Future value:

FV= {A*[(1+i)^n-1]}/i

A= semi annual deposit= 2,000

i= 0.04

n= 2*4= 8

FV= {2,000*[(1.04^8)-1]}/ 0.04= $18,428.45

We calculate the present value:

PV= FV/(1+i)^n

PV= 18,428.45/ (1.04^8)= $13,465.49

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