McGwire Company’s pension fund projects that most of itsemployees will take adva

Question

McGwire Company’s pension fund projects that most of itsemployees will take advantage of an early retirement program thecompany plans to offer in five years. Anticipating the needto fund these pensions, the firm bought zero coupon U.S. TreasuryTrust Certificates maturing in five years. When theseinstruments were originally issued, they were 12% coupon, 30-yearU.S. Treasury bonds. The stripped Treasuries are currentlypriced to yield 10%. Their total maturity value is$6,000,000. What is their total cost (price) to McGwire today?

Explanation / Answer

5 years

Coupon Rate 0% Number of Years toMaturity

5 years

Future Value (or) MaturityValue of the Bond (FV) $6,000,000 Yield to Maturity(YTM) 10% Calculating Present Value of the Bond: (UsingMs-Excel "PV" Fucntion): Rate of Return (or) Yieldto Maturity (Rate) 10% Number of Periods(Nper) 5 Future Value (or) MaturityValue of the Bond (FV) -$6,000,000 Total PresentValue of Bond (PV) $3,725,527.94 Today's total cost of the Bond $3,725,528

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