Question

Suppose a bond promises Rs.500 at the end of two years with no intermediate return. If the rate of interest is 5 per cent per annum what is the price of the bond?

Answer 1

Let the price of bond be Rs. P

We know that,

A = P(1+ r/100)ⁿ

It is given that
A = Rs.500
r = 5%
n = 2 years
Substituting the values in the formula

500 = P(1 + 5/100)²

or, 500 = P(1 + 5/20)²

or, 500 = P(1 + 21/20)²

or, 500 = P(441/400)

or, P = 200000/441 = 452.51

So, P = Rs 453.51
Therefore, Price of the bond is Rs. 453.51.