A treasury bond makes semi-annual payments of $300 for 10 years. At the end of 10 years, the bonds principal amount of $10,000 is paid to the investor.
(a) What is the present value of the bond if the annual interest rate is 5%?
(b) Suppose the bond is observed trading at $11,240. What discount rate are investors using to value the bonds cash flows?© BrainMass Inc. brainmass.com October 2, 2020, 6:10 am ad1c9bdddf
Here the investor receives 20 $300 payments at 6-month intervals.
PV bond = PV semiannual payments + PV principal payment
300 x [1/(0,05/2)] x [1- 1/(1+0,05/2)20 ...
PV of bond is calculated after finding the semiannual rate. Then yield to maturity is calculated.