Five years ago you purchased a $1,000 U.S. Treasury bond for $920. At the time of...
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Five years ago you purchased a $1,000 U.S. Treasury bond for $920. At the time of purchase it had a 12- year remaining maturity and a 6% coupon (paid semiannually). Market interest rates have decreased 2% since then. What is the current market value of your bond?
Homework Answers
Hello Sir/ Mam
YOUR REQUIRED MARKET VALUE IS $1,058.45.
Five years ago:
PV = $920
FV = $1000
n = 24
PMT = $60/2 = $30
Hence, we use excel to calculate YTM using "=RATE(24,30,-920,1000,0)" and it comes out to be approximately 3.5%. Hence, annual rate = 7%
Now,
YTM = (7% - 2%)/2 = 2.5%
FV = $1000
n = 24 - 10 = 14
PMT = $60/2 = $30
Now, using excel formula, "=PV(2.5%,14,-30,-1000,0)", we get the answer that the present market price equals $1,058.45.
I hope this solves your doubt.
Feel free to comment if you still have any query or need something else. I'll help asap.
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