14.) A U.S. treasury bond (selling at a par value of $1,000) that matures at the

Question

14.) A U.S. treasury bond (selling at a par value of $1,000) that matures at the end of 5 years is said to have a coupon rate of 6% if, after paying $1,000, the purchaser receives $30 at the end of each of the following 9 6-month periods and then receives $1,030 at the end of the tenth period. That is, the bond pays a simple interest rate of 3% per 6-month period, with the principal repaid at the end of 5 years. Assuming a continuously compounded interest rate of 5%, find the present value of such a stream of cash payments.

Explanation / Answer

Note :-Even though the Question is not clear as it mention Simple interest and compound interest for the same bond , We will assume and provide the answer as per simple interest only .

Calculate PV factor @ 3% for 9 years(since we diivided the yearly interest into half yearly)

= .971 + .943 + .915 +.889 +.863 +.838 +.813 +.789 +.766 +.744

=7.787

For 10th year = .744

Present Value of Bond = 7.787 * 30 + 1030 * .744

                                =233.61 + 766.32

                               = 999.93

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