7. The U.S. Treasury issued a 10-year bond on November 16,1998 , paying 6.47% in

Question

7. The U.S. Treasury issued a 10-year bond on November 16,1998 , paying 6.47% interest. Thus, if you bought $600,000 worth of these bonds, you would receive $38,820 per year in interest for 10 years. At investor wishes to buy the rights to receive the interest on $600,000 worth of these bonds. The amount the investor is willing to pay is the present value of the interest payments, assuming a 6% rate of return. If we assume ( incorrectly, but approximately) that the interest payments are made continuously, what will the investor pay?

Explanation / Answer

Present Value = Cash Flow x e-rxt

where r = rate of interest, t is time

The investor pay $283,249

Year Cash Flow e^rt e^(0.06*t) PV=Cash flow/e^rt 1 38820 e^0.06*1 1.061836504 36559.3 2 38820 e^0.06*2 1.127496761 34430.3 3 38820 e^0.06*3 1.197217218 32425.2 4 38820 e^0.06*4 1.271248945 30536.9 5 38820 e^0.06*5 1.349858535 28758.6 6 38820 e^0.06*6 1.433329067 27083.8 7 38820 e^0.06*7 1.521961126 25506.6 8 38820 e^0.06*8 1.61607388 24021.2 9 38820 e^0.06*9 1.716006239 22622.3 10 38820 e^0.06*10 1.822118065 21304.9 Total PV 283249

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