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 Discussion: All Topics Topic: Present Values

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 Subject: RE: Present Values Author: Karore Date: Dec 12 2004
On Dec 12 2004, sansansan wrote:
> A jewelry store advertises that for every \$1000 spent on diamond
> jewelry, the purchaser receivers a \$1000 bond at absolutely no cost.
> In reality, the \$1000 is the full maturity value of a zero-coupon
> bond which the store purchases at a heavily reduced price. If the
> bond earns interest at the rate of 11.5% compunded quarterly and
> matures after 20 years, how much does the bond cost the store?

Following procedure should be applied - I hope this will help

Present Value (P) = ?

Future Value (F) = 1000

Interest = (11.5/4) = 2.875 %

Time Period (n) = 20*4 = 80

P = =1000/((1+0.02875)^80)

= 104

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