Question

Last month Jim purchased $10,000 of U.S. Treasury bonds (their face value was $10,000). These bonds have a 30-year maturity period, and they pay 1.5%interest every threemonths (i.e., theAPRis 6%, and Jim receives a check for $150 every three months). But interest rates for similar securities have since risen to a 7% APR because of interest rate increases by the Federal Reserve Board. In view of the interest-rate increase to 7%, what is the current value of Jim’s bonds?

Answer 1

Answer:

current value is $8749.57

Explanation:

given data

face value = $10,000

maturity period = 30 = 30 × 4 = 120

interest = 1.5% every 3 month

solution

we will apply here bond price formula that is

bond price = coupon × $\frac{1 - (\frac{1}{(1+r)^n})}{r} + \frac{face value}{(1+r)^n}$          ............................1

here r is rate and n is no of period and

so rate = $\frac{7}{4}$ = 1.75% = 0.0175

and  coupon is $150

put here value

bond price = $150 × $\frac{1 - (\frac{1}{(1+0.0175)^{120}})}{0.0175} + \frac{10000}{(1+0.0175)^{120}}$  

bond price = 8749.57

so current value is $8749.57