Investment

Your local government is issuing a 5-year municipal bond that pays 6 percent annual interest, assuming you have $10,000 sitting idle in your savings account that you decided to invest. How much will this investment worth in 5 years?

Note: Please show your work and do not provide only the final answer.

ANSWER

Bond Valuation

The worthiness of a bond investment in the future is determined by the future value formula that has been demonstrated below. The future value implies the amount that one would expect to receive from the bond issuer. Thus, the future worthiness of a bond with a current face value of $10,000 at an interest rate of 6% after five years is as computed below. The worthiness of a bond in the next five years is essential in informing a rational investor if it is worth to invest in the security been offered by the municipal government. The decision to invest in the municipal should be based on the return it will generate.

Future value = present value * (annual interest rate + 1) ^{number of years}

Present value = $10,000

Annual interest rate = 6%

Number of years = 5 years

Future value = $10,000 * (6% + 1)⁵

Future value = $10,000 * 1.338

Future value = $13,382.26

The value that has been determined above implies that a prospective investor investing in the municipal bond that has been offered will earn a return of $3,382.26 after five years. This aspect implies that the value of the bond will increase from the present value. The worthiness of the municipal bond in five years has been determined by considering the interest the investor will be receiving annually. The higher value of the municipal bond in the next five years depicts it is reasonable to undertake the investment. Indeed, the interest of a rational investor is to maximize the returns from a given investment. Consequently, one should in the bond been offered by the municipal government instead of keeping it idle due to the return it promises to generate in the future.