A 10-year U.S. Treasury bond with a face value of $10,000 pays a coupon of 5.5%, (2.75% of face value every six months). The semiannually compounded interest rate is 5.2% (a six-month discount rate of 5.2/2 = 2.6%). What is the present value of the bond? (5 marks)

Solution:-

To Calculate Present Value of Bond-

Present Value = Coupon Payment * Present Value Annuity Factor (r,n) + Face Value * Present Value Factor * (r, n)

Present Value = $10,000 * 0.0275 * PVAF (2.6%, 20) + $10,000 * PVF (2.6%, 20)

Present Value = $275 * 15.227252 + $10,000 * 0.598484

Present Value = $4,187.49 + $5,984.84

Present Value = $10,172.33