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26 June, 02:40

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?

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  1. 26 June, 06:00
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    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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