A bond promises to pay Rs 105 at the end of one year and nothing else. If the market rate of interest is 5 per cent per annum, the present value of the bond is:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 100
Given:
Amount due after one year = Rs 105
Market rate of interest = 5 per cent
The present value is the sum which, kept today at 5 per cent, grows to Rs 105 in one year.
\( PV \times (1 + 0.05) = 105 \)
\( \displaystyle PV = \frac{105}{1.05} = \) Rs 100
Rs 110.25 is Rs 105 grown for one more year, not discounted.
NCERT (2026-27): “The Speculative Motive … Assume that the rate of interest prevailing in your savings bank account is equal to 5 per cent. Naturally you would like to compare the earning from this bond with the interest earning of your savings bank account. The exact question that you would ask is as follows: How much money, if kept in my savings bank account, will generate Rs 10 at the end of one year? …” Glossary: “Present value (of a bond) - That amount of money which, if kept today in an interest earning project, would generate the same income as the sum promised by a bond over its lifetime.” |