An investor desires to make an investment in bonds provided he realize 10% on his investment. How much can he afford to pay for a $10000 bond that pays 7% interest annually and will mature 20 years hence?

To determine how much the investor can afford to pay for the bond, we need to calculate the present value of the expected future cash flows from the bond.

Step 1: Calculate the annual interest payment
The bond pays 7% interest annually on a $10,000 face value. Therefore, the annual interest payment is 7% of $10,000, which is $700.

Step 2: Determine the number of periods until maturity
The bond matures 20 years from now. Since the interest is paid annually, there are 20 periods until maturity.

Step 3: Calculate the present value of the future cash flows
Using the formula for present value of a bond:
Present Value = Annual Interest Payment / (1 + Discount Rate)^Periods + Face Value / (1 + Discount Rate)^Periods

In this case, we want to calculate the present value at a discount rate (rate of return) of 10%. So, we substitute the variables in the formula:
Present Value = $700 / (1 + 0.10)^20 + $10,000 / (1 + 0.10)^20

Step 4: Solve the equation
By substituting the values and evaluating the equation, we get:
Present Value = $700 / (1.10)^20 + $10,000 / (1.10)^20

Evaluating this equation gives the present value of the bond, which is the maximum amount the investor can afford to pay for the bond in order to achieve a 10% return.