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Assume that Treasury bonds with a par value of $1,000,000 have 3 years to maturity and a coupon rate of 6%. The yield to maturity is 11% and coupon is paid semi-annually. What is the value of the bonds?

Respuesta :

Answer:

The value of the bonds is $ 877,814.

Explanation:

The value of bond can be calculated by discounting all future cash flow using effective rate of retun. Detail calculations are given below.

Future Value = Redemption present value (RPV) + Present value of interest       (PVI)

RPV = 1,000,000 (1+11%)^-3 = $ 731,191 -A

PVI = 60,000 * Annuity factor  =  146,623 -B

Future Value = A + B = $ 877,814

Annuity factor = (1- (1+i%)^-n)/i% = (1- (1+11%)^-3)/11% = 2.444

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