You recently inherited from your late uncle a US government bond that matures De
ID: 2482317 • Letter: Y
Question
You recently inherited from your late uncle a US government bond that matures December 31, 2025. The bond has a face value of 20,000 USD, which is equal to its redemption value. It pays an annual interest of 8%, payable semi-annually (i.e. as 4%) on June 30 and December 31 of each year. Answer the following question by performing your calculations both analytically and by using the relevant Excel functions.
a) If you wish to earn a 5% semi-annual return on your bond investment, what is the value of this bond to you on July 1, 2016?
Explanation / Answer
Given Conditions Details Amt $ Bond Face value 20,000 Semi Annual Interest @4% 800 As on Jul 12016. there are 9.5 years due for maturity with 19 semi annual inetersts due. Expected return =5% semi annually. So theoratically Bond Price as on Jul 1.2016 will be the PV of the Annuity of 19 payments of $800 and PV of Maturity Value $20,000 after 9.5 years all discounted at semi annual discount rate of 5%. Calculation of Bond Price Periods Cash Flow Interest+Maturity PV factor @5% PV of Cash flows=PV factor*Cash Flow Period 1 800 0.952 761.90 Period 2 800 0.907 725.62 Period 3 800 0.864 691.07 Period 4 800 0.823 658.16 Period 5 800 0.784 626.82 Period 6 800 0.746 596.97 Period 7 800 0.711 568.55 Period 8 800 0.677 541.47 Period 9 800 0.645 515.69 Period 10 800 0.614 491.13 Period 11 800 0.585 467.74 Period 12 800 0.557 445.47 Period 13 800 0.530 424.26 Period 14 800 0.505 404.05 Period 15 800 0.481 384.81 Period 16 800 0.458 366.49 Period 17 800 0.436 349.04 Period 18 800 0.416 332.42 Period 19 20,800 0.396 8,231.27 $ 17,582.94 So Bond Price as on Jul 1.2016. is $17,582.94
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.