Illustration
Vishal Mehta & Co., Mumbai issued 7%, 5-year bond on 31st December 2006. The par value of a bond is Rs. 100. This bond pays interest annually and discount rate 6% should be used to calculate the present value of each cash flow. The bond is redeemed at par after five years. Find out the PV of the bond on 31st December 2006.
Solution
Calculation of PV of 7% Bond using Single Discounting Rate
Year
Cash Flow (in Rs.)
PV (in Rs.)
2007
7
6.60
2008
6.23
2009
5.88
2010
5.54
2011
107
79.96
Present Value =
104.21