n investor intends purchasing a 3 years Rs.1000 bond having interest rate 10%.At what price the bond may be purchased now if it matures at par and the investor requires a rate of return of 14%.

To find the price of the bond, we need to calculate the present value of the bond's future cash flows, discounted at the investor's required rate of return.

The bond will pay interest annually at a rate of 10% on a face value of Rs.1000, which is Rs.100 per year. At the end of 3 years, the bond will mature at par, meaning the investor will receive the face value of Rs.1000.

Step 1: Calculate the present value of the interest payments.

The formula for the present value of an annuity is:

PV = Pmt * [1 - (1 + r)^-n] / r

where:

• Pmt is the annual payment (Rs.100)
• r is the required rate of return (14% or 0.14)
• n is the number of years (3)

PV = 100 * [1 - (1 + 0.14)^-3] / 0.14 = Rs. 248.69

Step 2: Calculate the present value of the face value.

The formula for the present value of a single sum is:

PV = FV / (1 + r)^n

where:

• FV is the face value (Rs.1000)
• r is the required rate of return (14% or 0.14)
• n is the number of years (3)

PV = 1000 / (1 + 0.14)^3 = Rs. 641.86

Step 3: Add the present values from step 1 and step 2 to get the price of the bond.

Price = PV of interest payments + PV of face value Price = Rs. 248.69 + Rs. 641.86 = Rs. 890.55

Therefore, the investor should be willing to pay approximately Rs. 890.55 for the bond.