Question

Last month Jim purchased $11,000 of US bonds (face value). These bonds have a 26 maturity period, and they pay 1 percent interst every 3 months (i.e. the APR is 4%, and Jim receives a check for $110 every three months). But interst rates for similar securites have since risen to a 8% APR because of interst rate increase by the Federal Reserve Board. In view of the interest-rate increase to 8%, what is the current value of Jim's bonds? The current value of Jims bonds are ???

Answer 1

The bond value will be the sum of the present values of all the cashflows discounted at 2% per period rate.

The present value has been calculated as: Cashflow / (1 + Discount rate) ^ number of periods

Periods	Cashflow	Discount	Present Value	Bond Value
1	110	2%	$107.84	$8,786.69
2	110	2%	$105.73
3	110	2%	$103.66
4	110	2%	$101.62
5	110	2%	$99.63
6	110	2%	$97.68
7	110	2%	$95.76
8	110	2%	$93.88
9	110	2%	$92.04
10	110	2%	$90.24
11	110	2%	$88.47
12	110	2%	$86.73
13	110	2%	$85.03
14	110	2%	$83.37
15	110	2%	$81.73
16	110	2%	$80.13
17	110	2%	$78.56
18	110	2%	$77.02
19	110	2%	$75.51
20	110	2%	$74.03
21	110	2%	$72.58
22	110	2%	$71.15
23	110	2%	$69.76
24	110	2%	$68.39
25	110	2%	$67.05
26	11110	2%	$6,639.11