A particular country\'s treasury issued a 35-year bond on February 10, 2011, pay

Question

A particular country's treasury issued a 35-year bond on February 10, 2011, paying 5.250% interest. Thus, if you bought $100,000 worth of these bonds you would receive $5,250 per year in interest for 35 years. An investor wishes to buy the rights to receive the interest on $100,000 worth of these bonds. The amount the investor is willing to pay is the present value of the interest payments, assuming a 3% rate of return. Assuming (incorrectly, but approximately) that the interest payments are made continuously, what will the investor pay? (Round your answer to the nearest cent.)

$______

Explanation / Answer

If 3% rate of return is assumed then present value of 5250 for 35 years is calculated as follows:

NPV will be:

Hence investor can pay 112807.90 dollars.

Year NPV 1 5097.087 2 4948.629 3 4804.494 4 4664.557 5 4528.696 6 4396.792 7 4268.73 8 4144.398 9 4023.688 10 3906.493 11 3792.712 12 3682.244 13 3574.995 14 3470.868 15 3369.775 16 3271.626 17 3176.336 18 3083.822 19 2994.002 20 2906.798 21 2822.134 22 2739.936 23 2660.132 24 2582.652 25 2507.429 26 2434.397 27 2363.493 28 2294.653 29 2227.818 30 2162.93 31 2099.933 32 2038.769 33 1979.388 34 1921.736 35 1865.763 Total 112807.9

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