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14 August, 07:39

Five years ago, you purchased a $1,000 corporate bond issued by general electric. the interest rate for the bond was 4 percent. today comparable bonds are paying 5 percent. what is the approximate dollar price for which you could sell your general electric bond?

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  1. 14 August, 08:35
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    We use the compounding interest formula in economics to determine the future worth of the value given the present value and the rate of interest. The applicable formula is F = P * (1+i) ^n where is the rate of interest, n is the number of years, F is the future worth and P is the present worth. Higher interset rate, investment time and present worth all incurs positive increase to the future worth of the value. The computations are

    For the first 4 years,

    F1 = $1000 * (1+0.04) ^4

    F1 = 1169.86$

    on the 5th year then,

    F2 = 1169.86$ * (1.05)

    F2 = 1228.35$

    The final investment amount after the 5th year is $1228.35
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