Company (A) pensions fund projects that most of its employees will take advantag

Question

Company (A) pensions fund projects that most of its employees will take advantage of an early retirement program the company plan to offer in ficve years.  Anticipating the need to fund these pensions, the company bought zero coupon US Treasury trust certificates maturing in five years.  When these instruments were orignially issue, they were 12% couon, 30-year US Treasury bonds.  the  stripped treasuries are currently  priced to yield 10%.  their total maturity value is $6,000,000.  What is their total cost (price) to the comapny today?

Explanation / Answer

Total Maturity Value of theBond                =         $6,000,000

CurrentYield                                                 =          10%

CouponRate                                                  =          12%

BondsPrice                                                    =          ?

Current Yield = Coupon Payment / Bond Price

0.10    = $6,000,000 * 12% / BondPrice

Bond Price      = $720,000 /0.10

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