# ECON: Confusing math regarding bonds?

1. Jun 3, 2012

### theBEAST

Here is a screenshot of a slide that the professor went over in class (PV = Present Value):
http://dl.dropbox.com/u/64325990/ECON%20102/Capture.PNG [Broken]

I think the reason why I don't understand what's going on in the math is because I don't understand the question at all. So the bond pays $100 each year and on the final year pays$1000. Then there is an interest rate of 7% per year (which means you would gain 7%. Am I right so far? Could someone please explain the intuition behind the math?

Edit: Since it pays a total of $1300 would that mean you would get a profit of$1300-$1078.73? Last edited by a moderator: May 6, 2017 2. Jun 3, 2012 ### tiny-tim hi theBEAST! 7% is not the interest the bond is giving 7% is the interest you're losing by not having the money in the bank (which would give you 7% interest) so the bond-issuer needs to put$100/1.07 in the bank now to have enough money to pay the first $100 at the end of the first year (etc) 3. Jun 3, 2012 ### theBEAST Thanks for clearing things up! But if the bank gives 7% interest, wouldn't it be better to put the money in the bank? With this bond you get$1300 at the end but if you put it in the bank for 3 years at 7% per year you get:
1078.73*1.07^3 = $1321 which is greater than$1300

4. Jun 3, 2012