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?
Let price of bond be P
A = P (1 + r/100)n
Where,
A = Amount = 500
n = Time = 2 yrs
r = Rate of Interest = 5%
500= P (1 + 5/100)2
500= P (105/100)2
500= P (21/20)2
500= P (441/400)
500 = 1.1025P
P = 500/1.1025
P = 453.51