A $1,000 United States Treasury bond with a maturity date 20 years from now and a coupon
Question:
A $1,000 United States Treasury bond with a maturity date 20 years from now and a coupon rate of 5 percent has a required rate of return of 5 percent. Calculate the value of the bond if annual interest rate payment are in force. Show your data inputs.
Strip the bond into an interest only bond and a face value only bond. That is, create a bond that has only the present value of the interest payments and one that is only the present value of the Face value. Which bond has more interest rate risk?
Which bond has more default risk?Now say that instead of annual payments, the Treasury makes payments every six months. Recalculate the value of your stripped bonds. Explain the results. Show your data inputs.
Fundamentals of Financial Management
ISBN: 978-1337395250
15th edition
Authors: Eugene F. Brigham, Joel F. Houston